The Depth of Fraud

Tamsin McMahon penned a rather alarming story about mortgage fraud on Friday. The number of crooked practices she compiled, regardless of their anecdotal nature, was both impressive and unsettling.

You couldn’t blame readers of that story for concluding that Canada’s mortgage market is on shaky ground thanks to widespread fraud. But a pile of anecdotes don’t paint the whole picture.

The story cites Canada Guaranty data that “one in 10 mortgage applications…have some element of fraud.” (That quote apparently originated from a First Canadian Title finding a while back.) Ten per cent is a sizable number in a country with 5.64 million mortgage households. You’d think all that fraud would translate into an avalanche of mortgage defaults.

Thankfully, it doesn’t. Arrears have trended lower for six years and now sit near the lowest on record. Moreover, the number-one factor driving them is unemployment, not fraud.

Of all the accounts in McMahon’s story, one that stands out was from Genworth’s Stuart Levings, who noted that early defaults (those occurring within the first year a sign of fraud and/or underqualified borrowers) has dropped by half since 2008. That’s tremendous progress in a short period, especially since home valuations continue to mount.

Mortgage fraud will never drop near zero, but it may very well drop further. High-profile cases and accompanying media attention have helped light a fire under policy-makers and regulators, more of whom are now requiring lenders and brokers to report all fraud instead of sweeping it under the rug. Stricter rules will help, like Ontario’s Regulation 188/08, section 14.2, which prohibits brokers from ignoring suspicions of fraud.

If we as an industry feel this is a bigger problem than arrears numbers suggest (a debatable point), then regulators must take charge. They need to:

  • reinforce that mortgage misrepresentation is a criminal offence
  • aggressively investigate and publicly censure mortgage originators who submit bad paper
  • force lenders to report all suspected fraud
  • notify borrowers when their applications have been flagged as fraudulent
  • improve information sharing among lenders
  • be prepared to adjudicate a truckload of cases

Will all of this happen? Probably not any time soon.

It’s a good thing then that just a small slice of fraud ultimately leads to defaults and losses.

  1. Who are you kidding mortgage broker? Fraud in the industry is wide spread and everyone knows you can find a mortgage broker who will help you fudge the numbers, job letters and whatever is needed to get a mortgage. Have CMHC open up al the mortgages to a third party and see how far the rabbit hole goes. Every Banker, mortgage broker and everyone else in the industry knows the housing bubble in Canada is all based on fraud.

    1. Tony, Tony, Tony,

      Where do we start with this comment?

      “Everyone knows” so it must be true? The housing bubble in Canada is all based on fraud?

      Does the data matter….at all?

      I’m open minded man, but you’ve got to back up tall claims like that with numbers. The data we see simply doesn’t corroborate that version of reality.

      How much fraud is perpetrated annually by the bad apple brokers you cite?

      What is the default rate of those shady deals?

      Give us something to hang our hats on my friend…

  2. I find it particularly amusing that the real estate bears keep conjuring up one empty theory after another. Having been dead wrong about an imminent real estate crash for the better part of a decade, they nonetheless appear to be completely unperturbed.

    Convinced that they have been right all along, the bears would have us believe that the only things propping up the real estate market are money laundering and fraud. After all, they have ‘proof’ in the form of multiple anecdotes.

    “Anecdotes often refer to the exception, rather than the rule: Anecdotes are useless precisely because they may point to idiosyncratic responses. Even when many anecdotes are collected to prove a point, “The plural of anecdote is not data.” (Roger Brinner).

    It’s all about scale and proportion. Yes, fraud and money laundering exist, as was ever the case.

  3. Fraud exists, 95% of the time it’s fraud for shelter, that is simply a fact, is it rampant? no, it’s not. Is it the reason for the property value run-up in Canada? no, that is just silly. The ROB article is balanced to the extent that it sites all the different players: brokers, road reps, branch staff, heck even vultures in the FRO office.

    So fraud is out there, the Genworth comments about tech reducing default and naturally the run up in house prices covering so up many problems when the home owner can be always selling for much more than they originally paid; means that fraud for shelter has far less damaging effects on the marketplace than it might have had in the past.

    There are methods that could discourage fraud for shelter even more aggressively but those systems cost money and right now with defaults at a historic low what is the incentive to really spend to completely eliminate fraud for shelter? It is unlikely fraud will ever disappear but I suspect the issue will not become more alarming to all players until property values level off or decline. Then we may see a more aggressive deployment of systems to really deter the abuses.

    Should we tolerate fraud in our industry? no, never, because the reputational effect harms the whole mortgage brokerage channel. Our goal must be for the public to view us as a better alternative to going directly to FIs and mortgage fraud is worst kind of negative influencer. So, we need to be vigilant and report it when we see it but the key changes that would have to be made to eliminate it altogether are likely too costly to be instituted today.

  4. I don’t doubt that 1/10 files will have an element of fraud. But things like knowing, and not disclosing, a client is quitting their job after closing for a new career is misrepresentation but most don’t report it.

    Or clients who need to lower debt payments and sell a car and pay of the subsequent loan who tell you they’ll buy a new vehicle after closing, while also misrepresentation and puts the broker in hot water, is likely overlooked in most cases.

    I’ve seen everything from clients presenting fake NOAs, employment and down payments (“it’s a gift!”) who are flabbergasted when I tell them I can’t help often end up getting their mortgage through another bank, broker or bank specialist. I haven’t seen one fraud for shelter client I turned away end up defaulting.

    I believe lenders need to start looking into this not to prosecute but to understand what happened and see how they can acquire these current fraud for shelter clients. There is a reason they resort to misrepresentation and if the default rate is acceptable perhaps we need to revisit lending guidelines to be more inclusive.

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