Fighting Mortgage Fraud

Special to CMT, By Karen Beattie, NEXSYS Financial 


Mortgage fraud in Canada has increased by a staggering 50% in recent years, according to Equifax.

While accounting for only 13% of attempted frauds in 2011, mortgage fraud was responsible for two-thirds, or $400 million, of the estimated dollar amount of financial
fraud in Canada. According to John Russo, Vice President of Equifax, that number jumped to $600 million in 2012.

First party mortgage fraud – whereby an applicant misrepresents their financial circumstances by getting creative with a pay stub, job letter or notice of assessment – is surprisingly common these days. In 2012 it made up the majority of the $1.6 million-a-day in attempted mortgage fraud. And the Internet is an enabler. Questionable websites do everything from creating paystubs to ‘reworking’ T4s and notices of assessment.

Last month I overheard a conversation where somebody openly admitted to forging his employment documents. He then arranged for a friend to act as his employer when the lender called to verify employment details.

A few weeks later, I came across another person who casually admitted to telling her mortgage provider that she was purchasing a home as an owner-occupied property when it was really a rental. That happens far more than lenders would like to admit.

Indeed, mortgage fraud is furthered by the fact that neither lenders, regulators nor the police currently consider fraudulent information on a mortgage application a serious crime.  It is this view of ‘soft fraud’ that may be reconsidered if a housing meltdown eventually occurs.

Ironically, some analysts within the Canadian mortgage industry feel that soft fraud will increase thanks to tougher mortgage regulations. New regs make it harder for applicants to qualify for mortgages and encourage less ethical borrowers to take “shortcuts.”

Not long ago, a colleague of mine had an interesting conversation with a lender. That lender found that in late 2012, the number of applications with a gross debt service (GDS) ratio just below 39% had skyrocketed. This anomaly was discovered in the months following the June/July 2012 implementation of guideline B-20 and the insured mortgage rules.

Clearly it wasn’t a coincidence that a larger-than-normal percentage of applications was being submitted with a GDS of 38.6% or 38.7%. Prior to this June/July 2012, the GDS on those same types of applications went up to 44%.

One can only guess at the attempted fraud numbers in 2013, as we bear the brunt of new Finance Department, OSFI and CMHC policies. As incidents of mortgage fraud continue to rise, we have to ask what lenders, brokers and agents can do to fight back. No one wants to doubt the honesty of their clients, but fraud detection can’t continue to be placed on the back burner.

The first step is likely to increase awareness about our obligations for due diligence. Mortgage originators must be better trained on how to spot fraud.

A study done in the UK a few years ago by the Financial Services Authority found that “Most small mortgage brokers were aware of factors that could indicate potential application fraud.” Yet, “only 41% verified applicants’ income and only 11% obtained evidence of the source of applicants’ wealth.”

A lack of objective due diligence and a tendency to just accept information as provided are a big part of the problem. Most mortgage applications reach lenders with all the boxes checked, mandatory fields completed, and required documents provided. But as an underwriter I regularly receive applications where it’s clear that nothing more than a cursory review of client information has been done.

How, for example, does it make sense that a 22-year-old with 6 months on the job is earning $120,000 per year? Why is the client buying a 700-square-foot condo as owner-occupied only a year after purchasing a 2,000-square-foot detached home as a primary residence?

There is a long way to go in order to turn around the uptrend in mortgage fraud. As a start, detection must be prioritized on the front lines of the mortgage business. An objective client review process with repercussions for non-compliance may be required for this to happen.

If something doesn’t make sense on an application, it must be questioned. If documents don’t appear legitimate, supporting information must be requested. Mortgage agents and lending officers must be provided with more training and tools to vet applications and documents. And they must use them, despite the potential lost commissions of cancelled deals.

Karen Beattie is Business Development Manager at NEXSYS Financial Inc. Karen has been involved in the Canadian Mortgage Industry for 20 years, starting at the lender level and then working as a mortgage agent. She now specializes in underwriting and document validation.

  1. While I appreciate the information provided in the article I think that the two specific examples given would set off alarm bells with every single underwriter that I know of.
    22 year old making $120K better be an famous video game designer or that app is doomed and the guy saying his 700 square foot condo is his new principal residence gets laughed out of every underwriting centre in Canada.
    As someone actively working with underwriters on many new apps every day I can am very aware that the level of underwriting diligence has skyrocketed in the last 2 years. For a mortgage broker to try to submit such applications today the only excuse would be that it is the first or second deal they had ever done.
    While I do not doubt that deals such as these are occasionally still sent to lenders they are DOA as soon as they show up on an underwriter’s screen.

    1. Just saying, I know quite a few 22 year olds making 100k a year. Its called working hard up north, in the patch as an engineer. :) No need for famous videos, and yes, that is way more common nowadays. The trades is where its at. Don’t single out individuals due to their age, lots of young adults I know make more than adults who been working their whole life…

  2. Underwriters may flag those scenarios but too many brokers don’t. I constantly see a lack of even basic due diligence. You’d be surprised for example how many apps are submitted without disclosing all of the applicant’s properties.

  3. Sadly, the inexperience of today’s underwriting corps is no help at all. They have minimal experience in noting potential frauds and rely more and more on automation. The older experienced hands have moved on or retired. Furthermore,unlike the old guard, the modern underwriter is afraid of telling a broker to get lost and take their garbage elsewhere. Please note – while there are many decent brokers out there, there are also a lot who are a blight on the industry and should not even be licensed as brokers due to character issues. Common sense is also lacking. There is more however space is insufficient to expound further.

  4. I’m not a mortgage broker and am not familiar with the logistics, but I would imagine that there are some liability issues involved in not performing due dilligence? If “soft fraud” is determined to be a major contributor to a housing bubble its possible that some of these mortgages could be audited in the future and the government may change its position on the severity of these infractions. An indirect example is the crack down of the CRA on flippers in Toronto and Vancouver.

  5. With all the stories we’ve been reading about in the paper over the last year, the amount of mortgage fraud in Canada sadly doesn’t surprise me that much. The two things that do are 1) that people would so brazenly tell even their closest friends that they’ve participated in this type of fraud and that 2) it’s not considered a serious crime in Canada. This last one surprises me the most, especially when it’s such a huge problem and something obviously needs to be done about it.

  6. Having listened to cops explain this stuff in fraud seminars, it’s like this: if it is fraud for profit – false identity, stealing title, fake appraisal all the things that involve getting money from a bank and then fleeing and sticking the bank with a loss; that’s what cops investigate and prosecute.
    Mortgages obtained using false documents and yet the mortgagor makes every single payment to the bank on time over the course of years, the cops say “nothing for us to look at” because there has been no loss to the lender. Right or wrong that is how it has been explained to me.
    I will tell you that these frauds for shelter are still very wrong and dangerous because if and when the real estate market takes a turn they may represent a miniature version of the wave that hit the US banking industry. No Canadian wants that to happen.

  7. All that is needed to prevent soft mortgage fraud is to get Income Information directly from The CRA.
    They would do this if they really wanted to stop it.

  8. People have to stop sweeping soft fraud under the rug. Banks should be required to report ALL incidents to the police. I’d like to see $10,000 fines for falsifying income documents with big BOLD warnings on mortgage applications. That would cut the cheating by half.

  9. I have better idea. If declared income is higher than what was filed for income tax, then the bill for taxes owed is sent.

  10. Even this article tells us that fraud has gone up significantly as the rule changes have come into place. Perhaps the rules (the solution) are creating the crime (the problem). What is the arrears rate in Canada? What has it been through the alt A phase? By making the rules ridiculous, you invite the players to figure out how to work with them to get to the end goal. Was the mortgage market more stable when lending was done based on the Five Cs, or is this cookie cutter, fill in the blank, use rates that have nothing to do with reality, way of underwriting making things so much safer. The reports from the big banks tell of an extremely low arrears rate. I am not suggesting fraud is good but when an atmosphere is created that says lie to me or you won’t get this mortgage…..well you see the beginning of the problem.

  11. ROB this article by Ms. Beattie is truly UNWORTHY of being posted in Mortgage Trends.
    First consider the source of the article. Ms. Beattie’s company is in the business of selling “fraud prevention systems”, so who better to stir the “panic” about mortgage fraud?
    If she wanted to really explain the significant sources of mortgage fraud she would have talked about:
    a) the source for the biggest cause of mortgage fraud through title theft were the designers of the electronic land registry system in Ontario. They left a loophole you could drive a Mack truck through that allowed fraudsters steal title to properties in Ontario, mortgage them, & run away with the proceeds. The hole has since been filled.
    b) the next biggest contributor to mortgage fraud was CMHC, for their contribution to the Boost & Flip frauds. Their attitude of “we don’t need no stinking appraisal because we have EMILI”, was known by every crook in the country. Declare a higher than true value, hope they only use EMILI to determine value, equals money in the scammer’s pocket.
    c) Finally the last major contributor to mortgage fraud was every MBS lender on the street. Credit score was in line & CMHC would insure the deal, screw the due diligence & documentation, just “paper the file”. Insure it, bundle it, securitize it, sell it. We made a few more million today. What new car/boat/toy will we buy with our bonus?
    So for Ms. Beattie to tell her stories about what she “overheard” & disparage mortgage brokers, especially “small brokers” in the process(I guess there is hope of her sucking in some “large” brokerage to buy her software), is truly ignorant and self-serving.
    There isn’t a mortgage broker/agent in the country that has not felt the changes imposed by B20 in lender underwriting, changes to CMHC guidelines & the need to “doc-up”.
    If OSFI forces all FIs to be compliant with B20, and more physical inspections/appraisals are done, fraud will have no where to go but DOWN. So her claims & her reasoning are truly invalid.
    Will people still try to commit fraud? Sure they will, but it will be the underwriter that calls for an independent appraisal or asks for “proof” of assets or income that will stop the fraud, not some piece of “wonder” software.

  12. The greatest fraud is that 5-year mortgage rates haven’t yet responded to the bond market.
    Always faster on the way up than on the way down? Newton would be shocked.

  13. Hi Mike,
    First off, thank you for caring enough to maintain our standards. :)
    Secondly, the best thing about this forum is that people can speak openly and honestly. Hence, critical comments are more than welcome.
    Further to your points, the fact that someone writes about a topic related to their company does not, by default, invalidate their judgement. If it did, then I—being a mortgage broker writing about mortgages—might as well close down this website.
    In this case, a company who deals with hundreds of applications a month and sees soft fraud regularly is as qualified as anyone to comment on this subject. Karen, who I know well, is on top of her game. And she graciously subjects herself to our constraint of writing for a general audience.
    Regarding the sources and magnitudes of fraud, the focus of the article is soft fraud, which comprises the vast majority of mortgage crime in this country. Of course, you are welcome to comment on other forms of fraud. One could write a book on each type. But it was not the intention of this story to analyze each.
    As for how this all reflects on brokers, no one can dispute that fraud is furthered by a small minority of mortgage brokers. Karen’s statistics and anecdotes were clearly not intended to reflect on the majority of honest hard-working people in our business.
    Fraud is everywhere in this industry. It is perpetrated by bank reps, credit union employees, lawyers, appraisers, you name it. We give no special deference to mortgage brokers.
    What the future brings, be it regulatory initiatives or private sector prevention, may or may not alleviate the dollar volume of soft fraud. In the meantime, we must keep this topic front and centre, both as a reminder of the growing concern, and as an industry deterrent. And we shouldn’t get overly sensitive about how publicizing the problem reflects on us as individuals.
    All the best,

  14. Have to agree with you Rob. The author of the article is in a position of knowledge, seeing this evidence daily. Having worked for lenders I know that they too see it daily and even if an inexperience UW may miss a red flag, their very experience UW managers will catch it.
    Would also say lenders in the MBS program do MORE due diligence. Being insured does not dismiss responsibility. Investors regularly review default levels and would cut off a lender if too many clients defaulted. Lenders do everything they can to protect that crucial investor relationship!
    Also the bank employees are just as bad and pressured by targets that a self employed broker doesn’t have. Spoke to a bank friend who said she had to work late “to manipulate the income on a file that didn’t qualify”. “You mean commit fraud?” I asked. “Well I have to hit my targets! my manager doesn’t care as long as we hit targets”.

  15. The title fraud loophole is closed, CMHC has tightened up emili and you clearly have no experience with performance monitoring of MBS pools. What value have you added to this debate?

  16. It’s probably because it’s so difficult to buy a house a first time buyer that you have to fudge the numbers. I’m not saying it’s right, but I understand. In the end, the bank owns the house. And almost all residential mortgages are paid on time. So I think this is down there with stealing candy from a baby (the baby shouldn’t have candy anyway). If you want to investigate fraud, how about talking about the derivatives fraud that has bankrupted nations around the world and only Iceland has arrested, and put on trial the “banksters”!

  17. I am a first time home buyer and when I recently went to PC Financial, they skewed the info on the application. I told him the truth of my employment but he increased both mine and my fiances length of employment by a few months and left out the fact my temporary employment status. My position IS classified as temporary but it’s with the government. There have been people working at this place for several years and they were classified as temporary. My manager says I have a secure position and I believe him.
    Since I am making a down payment of less than 20%, CMHC has the final say in this. My bank says they have put through worse applications and they’ve been approved though. Is this considered fraud? If I did get approved, this isn’t me committing fraud, right?

  18. If you knowingly allow false data to be used in getting an approval that is fraud. In this case I’d worry more about your employers contradicting what is on the application than your personal culpability.

  19. I bought a property in 2007. Before buying the property bank appointed an assessor. He assessed for 500,000 CAD. I could not rent or sell. I suspected mortgage fraud. In 2009 I appointed another assessor from the same institute and he assessed the same property for 375,000 CAD on the same day of the original assessment in 2007. I could not pay after 5 years of this fraud to the bank the mortgage and the property was assessed for 225,000 CAD and all my credits ruined

  20. What i have to add over the years there has been soft fraud re employment , and it was not taken seriously by the banks , if there is a slow down in the market and the prices start coming down there will be a panic to sell therefore the foreclosure rate will be higher then the banks and the insurance companies will start taking notice of each application , as the rental income will not justify a second property as this will cause a sales boom and therefore the prices will come down
    As everyone was in the tech stocks and Nasdak collapsed that is the same scenario playing out in the housing market
    So the smart people should sell now and max out there profits

  21. What would you do if your broker falsified documents (rental agreements with made up numbers), and sent them to the lender without your knowledge of it? And if you ask for those ‘made-up’ documents they tell you to piss off. Who would be responsible then?

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