Real Estate and mortgage fraud is a growing concern to the industry as high prices in some markets have squeezed buyers and attracted perpetrators. The victims of fraud can include homeowners who find their homes have had mortgages placed against them by unknown individuals. Other victims include buyers in neighbourhoods or in condo complexes whose homes have been artificially inflated or deflated.
Issues of fraud can range from prospective home buyers submitting fake or altered documents including letters of employment, bank statements or tax returns, to money laundering schemes, identity fraud and title fraud.
While some may consider upping the rental received on a basement suite or deciding to leave something out of their mortgage application as harmless "white lies," that are not doing anyone any harm, the reality is that any type of fraud puts everyone at risk -- lenders, insurers, consumers, and the economy.
In a recent Mortgage Professional Canada Fraud Summit, a panel of experts weighed in on the state of fraud in Canada and what's being done to mitigate risk for all involved.
In an online survey, Equifax found that 84% of Canadians felt the country's housing market had become too expensive for first-time home buyers. Sixteen per cent thought mortgage fraud was a "victimless" crime. And 8% admitted to making false statements on their own applications.
Why is fraud becoming more common?
The Canadian mortgage industry's rules and guidelines have become more complex. As prices increase, coupled with short housing supply, some Canadians feel they need to get into the market fast, even if they can't qualify in the standard way.
In a hi-tech world it's not always the case that lenders and borrowers meet face-to-face and more and more applications are received over the Internet, fax or e-mail. Then there's also pressure from consumers to have those deals close quickly.
Types of Fraud
There are two general categories of fraud:
- Fraud for shelter -- There may be no intention to default but an individual commits fraud in order to get a mortgage on a home they could not otherwise obtain or afford.
- Fraud for profit -- There is an intent to default and/or flip the property, then walk away with the proceeds. For example, title fraud -- a fraudster assumes the identity of a homeowner, then proceeds to use forged documents to transfer ownership of a property and will use fake identification to get the mortgage on the property, then walks away with the money.
How do they do it?
Actually, there are many ways but banks and non-bank lenders watch for three of the most frequent methods:
Falsifying Owner Occupancy
This is quite easy to -- a rental property requires a 20% down payment or more. However, if a buyer says they're purchasing an owner-occupied home, with a 5% down payment, then turns around and rents it, there's not a lot that can be done about that in advance of funding.
Playing with debt
If someone can't qualify for a mortgage due to a high debt load, they may ask friends or family members to loan them the money to pay off debt, which, of course, does not show up on a credit check. But they still owe the debt.
Lenders also look more critically at the following: Private purchases and sales, high ratio mortgages, equity gifts, powers of attorney, recent activity on a title and if the property is free and clear.
The costs of mortgage fraud
There are financial costs -- insurer payouts for defaulted loans and police and court costs to deal with offenders. Then there are the costs to the individuals who were not aware of the fraud and who are in danger of losing their homes. There is a reputational risk for all mortgage brokers and the erosion of consumer trust.
Detecting fraud has become a priority for the mortgage industry. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is investing in automation with a focus on fraud for commission, increasing income verification intelligence and improving Fraud Trending Reports.
Also, compliance is getting stricter and lenders and insurers are becoming more sophisticated and more hi-tech. They have the ability to model applications and behaviours, which offers a multi-view of a borrower. There is also pattern recognition software used by insurers.
But, fraudsters don't go away, they come up with more elaborate schemes. The industry and consumers need to stay on top of it all. So, educate yourself about fraud to better protect yourself.