One of the most devastating factors in the national collapse of confidence in the home mortgage marketplace is the pervasive fraud that infested the mortgage brokerage system. In the good old days George Bailey made home loans to his neighbors and community. He knew who he was lending to, and had a pretty solid idea of what they were capable of paying and what the homes in the neighborhood were worth.

In the recent mortgage and housing boom, significant percentages of home loans were originated by independent brokers. As salespeople their interests didn’t always align with the interest of the lender or the borrower. In many cases the drive to “get the loan done”, and the multithousand dollar commissions for doing so influenced brokers and their clients to stretch the truth to qualify. Lenders were just as anxious to create loans they could package and sell. Since the loan was being sold off to an invisible investor, the risk would soon leave the lenders books. Overall it created a tremendous incentive to cheat in ways large and small to get the loans written and placed.

Unfortunately, it is very difficult to underwrite for fraud. The rating agencies judging the quality of the bonds based on these mortgages could easily understand the likelihood of default in a standard marketplace, they didn’t account for the weakness and deceptiveness of the underlying data. Unfortunately there has been no easy way to easily identify trends of loan failures and tie them back to individual participants in the system. Next year that will change. Starting in January 2010 the Office of Federal Housing Enterprise is requiring a system where every participant in the loan origination process will be assigned an id number, and those numbers will be attached to the loan. Once in place the system will allow regulators to look at the aggregate loan performance of any appraiser, broker, banker and identify those whose loans are statistically bad, fraudulent or under-performing.

When combined with more stringent standards for borrowers to prove their actual incomes, the new standards should grind much of the fraud out of the origination process. So if you are gonna cheat, get it over with now.