Creating a Mortgage Fraud Law with Some Bite

I was just reading an article about how Mortgage Fraud is now a specific crime in Missouri, but couldn’t help but think to myself whether or not this law goes far enough. While I haven’t read the law itself, a $2,500 fine and/or jail is just not going to cut it. The loans must still be written off by the lenders, and of course, what happens is the banks eat up the cost, and the general public funds the bailout.

We’ve been bailing out banks due to the housing bubble for months now, and funding the crimes of those people who engaged in mortgage fraud and who in the end, couldn’t afford, or simply didn’t want to pay their mortgage anymore. I was thinking about all of this and came up with an innovative idea that would likely stop 90% of future mortgage fraud. Is it something that would ever go into law — not a chance — but if it did, it could change the fate of lenders and could prevent the average citizen from having to pay for the stupidity of others.

A Thought Experiment to Create a Law that Properly Punishes Mortgage Fraud

Those people who specifically committed this crime should NOT be let off the hook for the rest of us to pay. I believe that the law should mandate some kind of recourse beyond simply imposing a fine and/or jail. Frankly, I think the law is extremely weak. While it may have some teeth when dealing with real estate professionals who endorse such crimes, if the law looked deep enough, it would actually hold people responsible for their default.

Why not write a law that requires people who commit mortgage fraud and who default on their loan, to be responsible for a long-term payback of that loan?

If they couldn’t afford the loan in the first place, you’re asking how exactly they’d be expected to pay it back, right?

Why not add the ability for banks to garnish wages for people who commit mortgage fraud?

Actually, we can take it even further and also garnish the wages of those professionals who allowed or encouraged you to commit this fraud. Basically, you put the professionals on the line for the money in addition to the guy who directly engaged in the fraud . . . that would be a deterrent, wouldn’t it!

Landlords can go after renters who stop paying the rent and owe them money, with a garnishment. Why shouldn’t the banks or the federal government be able to go after the money that were screwed out of by the lying consumers/professionals?

While they may not be able to recover all of the money that was lost due to this mortgage fraud, at least they’d continue to bring in funds, ad-infinatum, from the guy who committed the crime and the “professional” who allowed it to happen.

Not only would this act as a deterrent from committing mortgage fraud, but it would also place a big red flag on someone’s credit saying that they are now paying off a loan that they lied to get. Essentially, the law could create a scarlet letter. Any future lender would then know to scrutinize your application EXTREMELY closely before giving you the benefit of a doubt and loaning you any money.

Wrap Up
Would such a law ever come to pass . . . I think it is extremely unlikely. But, if it were to, I believe we would see the virtual end of mortgage fraud as we currently know it!

Any thoughts on this little thought experiment about dealing with Mortgage Fraud?

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.