FRIAR BARNARDINE. Thou hast committed–
BARABAS. Fornication: but that was in another country,
And besides, the wench is dead.
- from “The Jew of Malta,” Christopher Marlowe, 1589/1590

Wars and calamities breed predators. Morality is almost always a casualty of the disorder following upon conflict and social upheaval. So we should not be surprised, however disgusted, that a new breed of predator has crawled out of the current financial wreckage. Desperate people facing the loss of their homes through foreclosure are an easy target. Some of the same unscrupulous operators who peddled subprime mortgages to people who could not afford them are now selling fraudulent remedies that purport to help homeowners avoid foreclosure.

According to the U.S. Federal Trade Commission:

Fraudulent foreclosure “rescue” professionals [aim] to make a quick profit through fees or mortgage payments they collect from you, but do not pass on to the lender. Sometimes, they assume ownership of your property by deceiving you, the homeowner. Then, when it’s too late to save your home, they take the property or siphon off the equity.

The scammers extract money from distressed homeowners in several different ways: by obtaining a fee in advance for promise of service; finagling a transfer of the property title to the ‘rescue’ firm by allowing the owner to remain as renter; claiming special relationship with or pretending to be the lender and having mortgage payments sent to the scammer’s address; and (illegally) charging a fee for modifying a mortgage under the new federal relief plan.

Greed and unscrupulous behavior are certainly not new phenomena. But today there are many more opportunities and much greater scope for financial predators. The increase in opportunities is largely a consequence of the growth of intermediaries and agents in financial transactions, which in turn results from specialization of function in the financial sector. In an effort to make operations more efficient and flexible, the financial services industry has copied long standing practices in the goods producing sector. For example, mortgage lenders use a variety of brokers to bring in customers; they rely on external appraisers to assess property values; they use external credit reporting agencies and in-house specialists to determine the credit worthiness of borrowers; they outsource the record keeping for their loan portfolios; and they contract with securities specialists and underwriters to assist in creating bundles of mortgages to offer to the investing public.

Each of these specialized functions creates distance between lender and borrower and enlarges the role of intermediaries. With each new intermediary comes an opportunity for exploitation or fraud, as the financial transactions in which intermediaries play a role become increasingly obscure to individual consumers. Making matters worse is the increased scope for mischief stemming from the use of the new interactive media available on the Internet. It is much easier than ever before to reach and interact with masses of consumers. Web advertising and email have democratized information access, but at the same time have empowered crooks. The anonymity of the Web gives license to commit acts of fraud that might be more difficult in traditional social contexts where face-to-face interaction often inhibits unacceptable behavior.

Action at a distance facilitates a diminished sense of responsibility. Of course there are crooks who steal from family, friends and neighbors, but many more who steal from people at a distance whom they don’t know and are not likely to encounter. Virtual organization requires loose coupling between actors to achieve its promised flexibility and efficiency. Unfortunately this requirement has the disadvantage of distancing people from each other and thus incurring the cost of reduced trust and responsibility.

LORD POLONIUS
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
- from “Hamlet,” William Shakespeare, 1599/1601

Few of us have been following Lord Polonius’ advice. Credit is the lubricant of the modern economy. In the throes of a major financial collapse triggered by excessive credit formation we are being urged to spend and assume yet more debt to stimulate economic activity and job creation. If it is impossible to operate on a strict pay-as-you-go basis, the next best thing is to make sure you borrow from people or organizations you know and trust.

The relationship between borrower and lender has become so attenuated that even legal authorities have a hard time determining the identity of the lender. A lender of record on a mortgage may not be the property owner since the mortgage might have been bundled together with other such loans to form an asset base for a mortgage backed security that was sold to investors. “We don’t own the property,” [said] a spokesman [for a bank]. “We’re the owner of record, but the investors who bought the mortgage-backed securities own it” (NYT, March 8, 2009).

Borrowing from a known party, company or individual, entails a moral obligation to repay because the transaction is based on a relationship of mutual trust. Lending entails the complementary moral obligation to serve the borrower by delivering accurate accounting and record maintenance. Central to these complementary obligations is the relationship of trust between parties who are known to each other. Trust is rooted in human relationships and becomes attenuated when those relationships weaken. The perceived obligation of an individual to an organization is not generally as strong as to another individual, but certainly much stronger that it is to an unknown party. Obligation and trust evaporate completely when the unknown party is several levels of remove from the individual. This is precisely what has happened with borrowers and lenders in the housing boom that preceded the current economic crisis.

Securitization of loan portfolios – packaging loans such as mortgages and selling them to investors – is an instrument of metamanagement, designed to improve efficiency and profits by leveraging money. Such practices can drive a wedge between borrowers and lenders, attenuating the social bonds needed to motivate the parties to a financial transaction to discharge their respective obligations.