Company Tries To Patent Giving You A Reward For Not Defaulting On Your Mortgage

from the financial-innovation-patents dept

John Bennett points us to a blog post by Felix Salmon questioning a potential patent on a "financial innovation" that involves paying homeowners a bonus if they don't default on their mortgage payments. The idea is to use this to avoid the increasingly popular tactic of "strategic defaults," where people stop paying their mortgage not because they can't, but because they know that, even with any penalties, they'll come out ahead in the long run.

However, Salmon noticed that in a Time Magazine article about the "50 best inventions of 2010," the author claims that this concept is "patented." The Time author (shockingly) gets this wrong actually. Turns out it's only been applied for (Patent app 20100205087), which leads Salmon into a discussion on patenting financial innovation. He (unfortunately -- and surprisingly) gets the basics wrong by saying "it's generally accepted that financial innovations can’t be patented," which I think would surprise anyone who's watched the patent system since the State Street decision came out in 1998. Hopefully, the Bilski ruling will keep things like this patent from getting approved, but it's too early to really judge the impact of Bilski.

That said, Salmon is exactly right about why it doesn't make sense to patent things like this "financial innovation," and also why the company might actually be better off if it had some more competition in the market:

But I'm not a fan of this development. For one thing, it's unnecessary. The barriers to entry in this business are high: Pallotta says LVG has spent millions of dollars over the past few years building and marketing the program, as well as running it by a lot banks, servicers, investors, and regulators. And what's more, LVG would probably benefit, at the margin, if and when its idea was ratified by the entrance into the market of other people doing pretty much the same thing.

More generally, I don't want to see a world where people wanting to do positive things in the housing market are stymied by worries over patent suits. There is a worry that sleazy operators will put themselves forward as doing homeowners a favor when in fact they're doing no such thing, but patent law is not the best way to stop such people. LVG had a good idea in 2009. But that doesn't mean it should be able to patent the idea, and implicitly threaten anybody else thinking about entering the space with an expensive lawsuit.

Of course, some would argue that the high investment from LVG supports the idea of a patent, since it'll be "cheaper" for the next player to do the same (which isn't necessarily true). However, I think that Salmon's final point in that sentence, talking about the benefit of competitors copying to help "ratify" the market is an issue that is almost entirely overlooked in the discussions over patents, but is an important element. If you look back at the history of successful innovations, it almost always helps to have real and direct competition to help defray the market education costs. Getting more entrants into a market quite frequently broadens the overall market, meaning that the players actually are able to make more money.

Filed Under: financial innovation, mortgages, patents