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Rate-Driven Subterfuge

People in the mortgage business have heard the terms “fraud for profit” and “fraud for shelter.” Both have long plagued the mortgage market. But there’s another type of fraud that some may not be aware of. It’s called fraud for rate, and it’s growing.

While not conclusively a trend, it seems that more and more mortgage applicants and mortgage originators are fudging applications and/or documentation to get a better rate. This is especially true with BFS (business for self) borrowers who often try to portray higher income than they really earn.

Stricter mortgage regulations seem to be the catalyst. “With the tightening of mortgage rules, a segment of the population has been effected by these policy changes,” says Joe Rosati, Vice-President, National Sales at Home Trust Company. As a result, “some of these borrowers have slipped into the alternative lending space.” That’s where lenders take more risk in exchange for higher interest rates and typically lower loan-to-values.

“We see a number of these applications still being presented as ‘A’ deals” when they really aren’t, Rosati adds. He recommends that brokers pay “closer attention to the applicant’s income and documentation” when there’s even the slightest reason for doubt.

Most borrowers who no longer qualify for prime mortgage pricing can still get approved, just at higher non-prime mortgage rates (albeit with more money down in some cases). But it’s better to be approved with less favourable terms than be caught trying to cheat a lender—which, by the way, is not as easy as some people think. Nowadays lenders invest heavily in fraud detection and have almost seen it all. If you’re a bad apple relying on a lazy underwriter to gloss over your documents, you’re rolling the dice.