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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.