BusinessWeek has an interesting article about the abuses that are starting to creep into FHA lending. Combine their report with the reports that as mortgage rates fell drastically this week and borrowers flocked into the mortgage broker offices to refinance and you have a mixture of less than pleasant ingredients.

The article recounts a number of cases of former subprime bucket shops, many of whom have been disciplined or even convicted of felonies, reopening and pushing FHA loan products with the same fervor they devoted to subprime. There’s a fair amount of detail as well of the oversight failure on the part of FHA and why it’s happening.  But the reason I bring the subject up at all is not to go into what was a predictable outcome rather it is to suggest that there is more at play here than just slimy mortgage brokers.

Now, I am not about to defend the seamier parts of the mortgage brokerage business. Standing up for mortgage brokers is a little like suggesting that rattlesnakes make good pets. People tend to laugh you off stage. What I will offer is that this ongoing fraud couldn’t exist without the complicity of borrowers.

I will concede that once upon a time there were some naïve people in this country that received loans based upon inflated incomes or some other lie and that they were totally duped by a sharpie. I will not, however, concede that the millions of middle class, educated borrowers who insist that they didn’t know that the income they stated on their loan application was inflated by a factor of three or four to one are anything other than serial liars. The American public discovered that crime gets you what you want to have and I don’t think they’ve forgotten that lesson.

If indeed FHA loans are now being made with fraudulent documentation it should come as no surprise. The volumes of loans that the U.S. mortgage market generates are far too large to be adequately policed by sound underwriting alone. If, as I fear, the borrowing public has learned how to slide around the edges and is willing to engage in such behavior there will always be willing lenders to assist them. There is a way to alter the behavior, though. Put some people in jail.

Reading the BusinessWeek article, I was struck by the fact that none of the evil doers cited had spent any time in the hoosegow. Sure they were fined, had licenses suspended and even convicted and paroled but none appear to have done any time. I can’t recall reading of a single case in which a borrower who misrepresented his or her income has even been prosecuted let alone jailed. Yet nothing so focuses peoples’ attention as the sight of someone they know or can relate to being marched off for an extended vacation at a government spa.

Maybe we stop coddling borrowers who lie and remind them that the fine print on the loan application does point out that it is a federal offense to make any misstatements of fact on a mortgage loan application and when they are discovered to have done so to prosecute and jail them. Naturally, the broker who abetted their crime goes along for the ride. The ethical failure of the American people as borrowers and lenders has cost this country trillions of dollars. It might be time for some payback.