Monday, July 31, 2017

Scams and Freedom

One of the problems with a "free economy" is that it offers many opportunities for scammers. This was first brought home to me when in 1983, my Bulgarian roommate (not of Bulgarian descent, but literally from Bulgaria) in New York came back to our Columbia apartment with what he thought was a great deal on a camera lens. He was from a communist country, and naively believed he was getting a good deal, when in fact he had bought a damaged lens. He was understandably angry that such illegal (or at least immoral) activity could occur in a major city. For him, this was an indictment of the "free" market. I just thought it was the result of his naivete and greed (for a good deal, "too good to be true"), and unscrupulous merchants, but agreed that it should be illegal, though it turned out there was nothing my roommate could do.

It turns out that there a number of types of scams that occur when you buy a house. Your purchase of the house, and the mortgage you take out, are all public information, so people take that information and try to cheat new home buyers. We got the following letter in the mail:

The letter looks like it comes from our bank, the Busey Bank. The phrase "Notice: Financial Information Enclosed" is actually misleading. Inside, it has a return envelope, with the official "No Postage Necessary" seal. It looks important and official.

Then the card inside seems official because it has our name and address, the name of the bank, and even the exact figure of our mortgage amount (I've redacted the personal information, even though you can probably find it somewhere on the internet). It implies that I have to provide this information to comply with a mortgage protection plan that I already have.

What is astonishing, also, is that this arrived just about 10 days after we closed on our house, and just days after we moved in.

Only if you read the fine print do you realize it is not from the bank. The fine print says: "Information provided by Mortgage Protection Division. Not affiliated with any lending institution. All mortgage obtained only through public records. Benefits and carriers will vary coverage and are subject to underwriting approval."  This "Division" is the name of a company, not a division of my bank. Sneaky.

This is really a sales pitch attempting to get me to buy mortgage insurance. They want me to give them more information, including our phone numbers, so they can try to sell insurance. Fortunately, at our closing, when I signed for the mortgage, our banker told us to ignore all these junk mail solicitations, but my wife and I still found ourselves looking at these twice to make sure they were not important (once my wife simply handed it to me to take care of, thinking it was important--and she's a lawyer!)  It is well known that mortgage insurance is a bad deal for consumers; but it is very profitable, as much as 40 percent return to the insurance company, which leads company to try to drum up this business, hence the junk mail.

It is sometimes difficult to draw the line between deception and advertising. Plus, attempts to protect consumers can end up hurting them. Lisa Servon has studied payday loans and argues that they actually provide a service to poor people, and should therefore not be banned, though well-meaning liberals increasingly push for such legislation. There are certain emergency situations where paying a high interest rate on a loan makes rational economic sense. J.D. Vance in Hillbilly Elegy gives an example where he took out a payday loan to avoid his rent check bouncing, which would have cost more than the interest he paid on his payday loan, not to mention the cost to his credit score.

So maybe I'm being like the well-meaning liberals who want to ban payday loans because they don't understand the needs of the poor, but I find it astonishing that deceptive practices like the marketing for mortgage loans are allowed. I suppose they are a price we pay for having a free and dynamic economy. Still, I also wonder how people in that industry sleep at night, knowing they are getting business by misleading customers, both in their solicitation methods (with the misleading letters) and in the products they sell (which are not as good as simple term life insurance). One thing is sure; I'm being very American in expecting the market, and indeed the world, to be fair. Most peasants have long known the world is unfair and that the elites are out to exploit and take advantage of them. I think my friends in Taiwan believe scams and deception are inevitable (even though most people are very honest in Taiwan). It is a sign of the society and times I grew up in that I can believe deception should be banned. For most people, it is all too common, a given of market life. And perhaps it is.

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