Mortgage fraud will continue to reign in the mortgage industry as long as mortgage originators, (a.k.a: mortgage brokers), continue to work on a commission based pay structure. The commission based system is a breeding ground for dishonesty and fraud. After all, if a loan is successfully originated the broker will take home a commission check. If the loan is denied, (because the borrower’s credit or financials are unsuitable to attain a mortgage), the broker will go home empty handed. In my opinion, the commission check provides a temptation for fraud that is too great for many mortgage brokers to pass up.
A video on CNN Money highlights this very issue. The video reported that fraudulent loans are skyrocketing because ‘the problematic structure of the industry hasn’t changed. Real estate brokers and mortgage brokers are still getting paid on commission and loan originators are still getting paid according to the volume of loans they do, not the quality. That’s got the same kind of incentives and pressures that got us into the housing crisis in the first place.”
When asked about the specifics of fraud the video reported that “people are lying about their income and also misrepresenting their job descriptions and there’s also a lot more deception about outstanding debts, how much they owe and leaving them out altogether.”
In truth there is very little reason other than human decency for participants in the loan origination process to remain honest. The borrower may forge employment or debt information in an effort to qualify for a mortgage or receive more favorable mortgage terms. The mortgage broker may turn a blind eye to the borrower’s half-truths in an effort to earn a commission. By the time the loan is accepted and processed the lender is holding onto a risky mortgage, without understanding it’s true risk. Without major reform to the pay structure of the mortgage process I believe fraud will continue to plague the mortgage industry. In my opinion the first step in mortgage reform is to alter the pay structure of mortgage brokers and loan originators.