Mortgage Fraud is Thriving in Canada
Mortgage Fraud is definitely thriving in Canada. The increase in government regulation of the mortgage industry has been instrumental in reducing the number of risky mortgages that Canadian banks have extended since the collapse of the housing market. It also means that there has been significantly less fraud, because banks have had to perform (and document) more due diligence than they did before the recession. However, this has caused banks to lose revenue as well, because they have had to turn away a lot of potential borrowers whom they would have approved in years past. While some of those borrowers might have defaulted, the vast majority would have made their payments on time, contributing to the bank’s profitability.
What this means is that banks are putting pressure on their loan officers to sell as many mortgages as they can inside the new guidelines, and then to augment the revenue coming into the bank, they are also told to sell such products as creditor protection insurance to borrowers. That adds to the balance on the loan, bringing in more principal and interest income to the bank. In the meantime, they are burning through loan officers, who are flaming out because of all the pressure. The end result is lending institutions and professionals in the mortgage industry who are committing fraud to get as many people into loans as possible. Previously, the concern about mortgage fraud was about potential borrowers making up information to gain approval, but the concern has now shifted to the institutions, who are trying to build up revenue through as many means as possible.
If you think about it, recent trends in the Canadian real estate markets cause this to make a lot of sense. Incomes are stagnating, but home prices are going up. That means that you have fewer buyers trying to buy more homes — while the prices are staying high, because the sellers are optimistic that they can get someone to pay what someone else paid for a comparable property a few blocks away. So brokers, lenders and realtors are all fighting over dwindling commissions — and the Canadian government keeps adding more and more rules to make owning a home more of an obstacle, causing new home sales to go down even further.
Consider the example of Home Capital Group, Inc. — the largest alternative mortgage lending source in Canada. In 2015, they severed ties with 45 different mortgage brokers. The reason? Someone send an anonymous letter to Home Capital Group’s board of directors alleging a pattern of falsified documents (such as income statements and letters verifying employment). Those 45 brokers who were fired had brought in almost $1 billion in new loans the year before. While that’s not a whole lot of money given the size of the Canadian mortgage industry ($1.3 trillion), $1 billion is a lot of lending — and a lot of money to lose should the borrowers not be able to make their payments.
Other sources verify the scale of the fraud. Equifax, one of the two major credit bureaus in Canada, reported that it has flagged about $1 billion of attempts to commit mortgage fraud since 2013 among the lenders who use the bureau to verify borrower information. Canada Guaranty, a major mortgage insurer, reported in a 2012 presentation that about 10 percent of all mortgage applications contain some sort of fraud.
One reason why this is going under the radar at such a considerable rate is that experts refer to this as “fraud for shelter” or “soft fraud.” The people who are submitting the fraudulent applications, by and large, really want to own a home and make mortgage payments each month, but they cannot quite earn qualification for a conventional home loan. Sometimes it involves people trying to purchase a home that they could qualify for with a larger down payment and at a higher interest rate. However, they alter their bank account statements and their income verification documents so they can get the cheapest mortgage available on the market. Other, more elaborate schemes involve falsified employment letters that brokers submit to a spectrum of lenders to find the best deal for their clients.
If you’re having an initial consultation with a mortgage broker, and the broker tells you about some up-front fees, that’s a potential sign that fraud may be in the works. Reputable brokers get paid by the lender when the deal closes. However, brokers have started a cottage industry of false documents (pay stubs, tax documents and bank documents). Then, when clients go back for renewal on the loans that were funded with those false documents, the fees can be significant.
On the broker’s end, a client who comes in with a pristine mortgage application can raise eyebrows, because even the most blue-chip clients often forget to bring a document or two to the first meeting and have to be reminded to send the rest in.
The fraud isn’t just in the alternative mortgage industry, though. The big banks, credit unions, monoline mortgage lenders — and even government employees — have been implicated. The Ontario Ministry of Community and Social Services found that the Family Responsibility Office (an agency charged with enforcing family court judgments) fired at least one worker after they found fake pay stubs that he had been making while on the job.
There are many factors that have pushed people toward committing these acts of fraud. The government requiring higher premiums for mortgage insurance and shorter mortgage amortization periods has not helped, because the average Canadian is now having an even harder time qualifying for a mortgage, particularly in such pricey markets as Vancouver or Toronto. The policies were designed with a good intention — to keep the industry free from the sort of meltdown that happened in the U.S. However, the rules are now pushing good people who would have qualified for financing in the past into a riskier sector of the market. Brokers who recognize that people want to make their mortgage payments and in all likelihood will be able to are helping them gain their financing fraudulently. It will be interesting to see how policy changes to meet this new challenge.