Idea to Prevent Future Mortgage Fraud

The biggest problem I have found in addressing flawed mortgage originations is that when there is wrongdoing on the part of industry it is often perpetrated by mortgage brokers. Many mortgage brokers are honest, but others spurred on by the desire for sales commissions commit fraud when inducing people into deals. This was widespread in the the subprime mortgage market during the past few years.

Fraud is a common-sense type of wrongdoing with a long history of being remedied through private lawsuits. Essentially, fraud exists when someone tells lies or knowingly hides the truth in order to obtain benefit from other. Some mortgage brokers in subprime deals lied about mortgage terms, altered documents, and made other false material promises. A common one was when a broker would promise to quickly refinance someone out of a bad deal.

This would often happen at a closing, when it was too late for a buyer to practically back out. The broker would urge the borrower to not worry and go ahead with the deal because the broker would be there for them to fix the problem later. These promises often proved false.

This is the sort of fraud that would have a fair shot of a judicial remedy but for one thing. Often brokers and their firms are small and thinly capitalized. So when a distressed borrower goes searching for an attorney to take a case on a contingency fee basis, the search proves fruitless. Lawyers cannot reasonaby sue someone for damages when they prospects of collecting a judgment–and attorney’s fees– is speculative and remote. As the saying goes, you can’t get blood from a stone.

A solution to this is to require that mortgage brokers have insurance or a bond in order to do business. This exists in the context of many other circumstances and industries. If there is insurance or a bond to proceed against, even a thinly capitalized brokerage firm can be an attarctive litigation target. This would create key incentives to allow private lawyers to fight for defrauded consumers and would help keep rouge mortgage brokers in check.