Borrowers Will Be Borrowers

Despite the increased attention directed at mortgage fraud since the collapse of the subprime market, fraud continues to be a major issue in newly-originated loans, reports the Mortgage Asset Research Institute (MARI). The study showed a 42% increase in in reported incidents of fraud in loans originated during the first quarter compared to a year ago.

This almost certainly has more to do with lenders beginning to actually investigate and report fraud on the part of borrowers (as opposed to encouraging it), than with an uptick in borrowers lying on their applications. Certainly, borrowers should bear a large degree of responsibility for the current subprime mess, as many lied about their income, employment, or intentions to secure loans they could not actually afford or profit by purchasing and then “flipping” or renting out properties they represented would be their homes.

But, this study illustrates that there will always be some borrowers who attempt to game the system for their own benefit. Only in an atmosphere of deregulation and encouragement by the lenders, markets and investors could these practices flourish and become the norm. This counsels in favor of stricter regulation of lending practices, criminal penalties for mortgage fraud, and more prescient investing by Wall St. and the ultimate investors to create the proper incentives for lenders to filter out fraud in its inception.

Indeed, MARI concluded in its Quarterly Fraud Report, “[a]s lenders pursue higher-quality loans for the market, the priority should be on identifying poor quality at the earliest possible point in the process — and at the lowest possible cost. In MARI’s view, the origination and prefunding processes offer the largest and least expensive opportunities to assure funding of higher-quality loans. How a lender accepts or rejects a loan application at the front door is often all a criminal needs to see how much further he or she may push through the loan process.”

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