Mortgage Fraud – Don’t Let It Happen to You

There has been a growing concern about fraud in the industry for a number of years.  According to Equifax, suspected fraudulent mortgage applications have increased by 52% in Canada since 2013.

Because the mortgage industry’s rules and guidelines have become more complex, there is increased diligence among lenders and brokers.

The mortgage stress test has made it more difficult for some consumers to qualify for a mortgage. And in today’s high-tech world, it’s not always the case that lenders and borrowers meet face-to-face.

There is also pressure for some files to close quickly, from consumers who expect their real estate transactions to be fast, with minimal paperwork, which could lead to potential fraud.

Categories of Fraud

These are the general categories of fraud:

1. Fraud to get shelter. An individual commits fraud in order to get a mortgage on a home they could not otherwise obtain or afford.
2.  Title Fraud. The identity of a homeowner is assumed and a new mortgage is taken out assuming the homeowner’s name and credit history but with loan proceeds going to the fraudster. The fraudster will use forged documents to transfer ownership and will use fake identification to get the mortgage on the property.
3. As part of other criminal activities. A mortgage may be fraudulently obtained to get access to a home for illegal purposes.

These are the general types of fraud that occur:

1. Fraud Involving Property.  Overvaluation of property; misrepresentation of property characteristics; builder bail-out scheme using a “straw” buyer.
2. Fraud Involving Employment Status.  Forged employment letter; forged or altered pay stub; inflated income; misrepresentation regarding self-employment
3. Identification Fraud.  Forged or altered ID, nonexistent individual
4. Equity Fraud (Down Payment). Bogus gift letter; bank account statements not the borrower’s
5. Title Fraud. Fraudulent title transfer when mortgage has not been paid in full; property not in name of seller; identity theft relating to title fraud

Fighting Fraud

It’s in the best interest of the real estate and mortgage industry to work together, along with consumers, to reduce fraud. To further protect yourself and to help avoid the situation:

• Always store personal information, including birth certificate, SIN, bank account numbers and credit card details, in a secure place
• Shred documents, such as credit card statements
• Never reply to spam or e-mails that ask for banking information, credit card details, passwords or other sensitive information
• Safeguard your personal financial information.
• Contact your mortgage lender or broker first if you are having difficulty making your mortgage payments.
• Consult your lawyer before giving another person a right to deal with your home or other assets.
• Do a land title search with your provincial or territorial land registry office. This search will show the name of the property owner and any mortgages or liens registered on the title.

You can also help to protect yourself by inspecting your credit report at least annually by contacting Canada’s two credit-reporting agencies: Equifax Canada and TransUnion Canada.

Fraud is serious business in Canada and has a negative impact on the entire industry. Fraud hurts people, not just companies or the government. When lenders are defrauded, consumers pay the price.  Losses from fraud could ultimately result in higher interest rates and fees for borrowers.

TMG mortgage professionals stay up-to-date about mortgage fraud through internal training sessions, and through industry educational sessions. They understand the concept of fraud, recognize fraudulent schemes and understand their consequences. This knowledge helps brokers protect themselves, their clients, their business relationships, and the industry as a whole.

Mortgage fraud becoming more common

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.

Lender 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.

What’s next

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.