Income verification

Reaction to CMHC’s Clampdown on Mortgage Fraud

Last month the Canadian Mortgage and Housing Corporation (CMHC) formally asked the Canada Revenue Agency to take a more active role in verifying income claimed on mortgage applications in an effort to clamp down on mortgage fraud.

The CMHC says the move is necessary given that “the industry’s current detection tools have not kept pace with the increasing sophistication of threat we face,” according to its plan. Data backs this up, with a 2017 Equifax study finding that a full 13% of Canadians would be comfortable lying in order to get a mortgage approval. The study also noted a 52% rise in suspected fraudulent mortgages since 2013.

How we got here

Back in 2008, when the financial crisis hit the United States, Canada was in comparatively good shape because of the solid infrastructure in place to manage the mortgage system.

In 1938, the Federal Government passed the National Housing Act “to promote housing affordability and choice; to facilitate access to, and competition and efficiency in the provision of, housing finance; to protect the availability of adequate funding for housing at low cost; and generally to contribute to the well-being of the housing sector in the national economy.”

Seven years later, in 1945, the CMHC was formed to administer the National Housing Act and provide mandatory mortgage insurance. One of its mandates was to clearly define the amortization times and mandatory down payment amounts on mortgages it would insure, carefully balancing the risks while still making homeownership possible. And, for the most part, it did a good job.

But then in 2006, amid the run on housing prices in the U.S., the CMHC started offering mortgage insurance on 40-year terms. Critics argued this would lead to too many unqualified borrowers getting mortgages, which would jeopardize the system.

Government rule changes over the years slowly reduced the maximum amortization for insured mortgages to a maximum of 25 years.

While this rollback was good for the market, and ultimately better for borrowers in terms of interest savings, it’s made qualifying for a mortgage much more difficult, particularly given the rapid rise in home prices.

And that’s led to desperate homebuyers increasingly misrepresenting incomes on mortgage applications in order to sneak under the debt ratio requirements.

The CRA Solution: Independent Income Verification

As a result of the CMHC request, the CRA says it is now exploring ways to improve how it delivers taxpayer-specific information in a secure manner, including securely sharing tax information with financial institutions contingent on client consent.

Marshall Tully, a mortgage broker in Toronto, supports the move by the CRA.

“Fraudulent income documents can be easily created for salaried employees and self-employed alike,” says Tully. “The mortgage application process can be extremely document heavy. This creates opportunities for fraud. Giving lenders direct access to CRA data will allow for accuracy and speed in confirming income.”

Paul Taylor, President and CEO at Mortgage Professionals Canada, agrees.

“It’s difficult to argue against any method that would provide additional verification,” says Taylor. He went on to quell the fears anyone might have about CRA involvement. “CRA will be very protective of its data; it is sensitive financial information, so whether it is provided directly or through a third party, I expect (stringent) requirements for borrower authorization to access the information.”

But not everyone is behind CMHC’s request for direct involvement from the CRA.

Rena Malkah, owner of CYR Funding, has been a mortgage broker for 44 years and thinks this is an issue best left to underwriters.

“Their job is to verify the claims. If they can’t they should be fired and replaced by someone who can,” she said. She adds that credit rating is more important than income verification anyway. “If someone has a high credit rating, it shouldn’t matter what their income is. If they fight and scrap for under-the-table money to pay their bills on time, then it should be of no interest to the insurance company where the money comes from. And besides, involving CRA opens more people up to audit.”

Helen S. is a 61-year-old retired public accountant from Oakville, and the mother of a 26-year-old, and she agrees with Malkah. Her son earns just under $40,000 a year as a baker and she wants him to buy a home. She’s prepared to pay a percentage of the mortgage payments but she wants the mortgage in his name.

“How I choose to set my son up for success is none of CRA’s business. I know he won’t default,” she says. “My broker knows too. The CRA doesn’t have to be involved. We already give them enough money.”


Income verification
  1. The comments in the article by Rena Malkah are totally unbelievable! Does she really believe that income doesn’t matter and that only a high credit rating is what matters? If this is an accurate quote of Rena Malkah I suggest that FSCO takes a close look at her business practices.

  2. Rena, firing? If she’s saying she can identify manufactured income documents 100% of the time, and then support this to the authorities, she should be contracting herself out to the RCMP and regulators, possibly a magic show. The other 99%, from broker to lender, cannot 100% identify excellent manufactured documents created from relatively inexpensive software, or even order from 3rd party services; in some cases involving rings who have spent years creating false business’, staging income and even to the point of using 3rd party payroll services.

    Helen is also missing the point. They’re not talking about reporting income to the CRA, they’re talking about verifying it. Easy as – Applicant 1 makes 40k year, CRA = Yes. Applicant 2, 60k/yr, CRA = Yes. But, since “She’s prepared to pay a percentage of the mortgage payments but she wants the mortgage in his name.”, it could be possible she doesn’t realize she needs to be on the application in order to use her income (for prime loans for sure).

  3. This is so wrong on so many levels. Privacy and taxpayer protection being the primary concern. Other than this it looks like Mortgage Professionals want to get commissions on the job done by CRA and algorithms. Here is an idea – KYC – Know Your Client. Invest your time and effort, and earn your money yourself.

  4. Problem is high land costs and stagnate wages. Down payments should be reduced to help those who don’t have family with ability to gift the downpayment. Secondary homes should require more substantial down since they pose a larger risk and allow more 1st time buyers compete.

  5. We definitely require this kind of verification system to be placed in Canada..
    Brokers and businesses wants to make more money by any means and this move won’t make them happy..
    I believe if anyone applies for mortgage, they provide their financial information to the mortgage brokers then why someone should have any problem with their income verification..
    If you haven’t done anything wrong then one shouldn’t be worried..

    Many people have no idea about the mortgage fraud and it is a well placed fraud happening in this country with the help of mortgage brokers and bank underwriters..

  6. Mortgage fraud is real and the cost of fraud is equally as real which is what the consumer pays for when the mortgage is insured. Insurance premiums reflect the the associated costs (which includes fraud claims), therefore; it’s in the consumers interest to reduce mortgage fraud and income verification through CRA will aid financial institutions and brokers in this endeavour. Based on 40 years experience in the financial industry and ten years as an auditor I can attest to the creative fraud schemes.

  7. Mr. Yurman’s suggestion that a roll back from 40 year amortization to 25 year prompted an increase in income deception is just laughably wrong.

    Don’s attack on Rena a bit misguided, Don likely has never worked in the mortgage industry and does not understand the dynamics of private lending but then again Rena only does one or two bank mortgages a year and does not understand the true nature of “A” mortgage underwriting. Rena’s observation is quite correct in one way, if the borrower has been in the house for many years, made mortgage payments on time and has a high credit rating, the fact that they may demonstrate little income to CRA is more or less meaningless if you are a knowledgeable private lender, you understand that.

    Two things are true: firstly, our industry is moving towards faster speeds and much purer certainty of accurate documentation of underwriting conditions. If a CRA verification link enhances those items bet it will happen. Secondly the federal government wants to find more ways to encourage the self employed to declare more income so as to pay more tax and if this enhances that, double down on the bet.

  8. I am not a mortgage person. But I believe this will be awful to this industry. Power will be taken and everythinh will be automised. There will be no need for mortgage people or creative ways to get financed. Taxes will go up. Real estate sales will stay stagnate. And big banks will have more access and more power. CMHC or insurers will charge more for stated income premiums. Market will be mix. It will be a benefit to alternative side mortgages (higher rate). Overwall more subsceptible to US like mortgage crisi which they had a few years back. I say NO TO CRA IN PROVIDING INFO TO ANY BANK WITHOUT MY EXPLICIT CONSENT!!!

  9. Banks, mortgage brokers and builders have made people fool. when government lowered interest rates people because of their cunning nature of making more money started buying and selling house which sparked price hikes unnecessarily, during which builders thought if buyers are willing to pay 600K-900K for garbage house why should we stay behind and they hiked their prices as well saying that labor and material cost went up and mean while mortgage brokers were the one who benefited most because they get commission for buying and selling house. Some mortgage brokers even suggests that buy this house or business now and after 7-8 months we can easily sell it off for 60000$ more, that’s what sparked price hikes. people need to be smarter than this guys and think of their coming generations. Houses are for raising family not for making money.
    And because of this now, new buyers are suffering additional CHMC fees which is again burden for new buyers and they want CRA’s involvement to curb mortgage fraud ….lol…CHMC fees are unnecessary it should be removed because bank has house as a security then why do they need additional insurance fee levied on people

    According to me to curb the rising house prices government should pass a bill…..once you buy a house you can’t sell it for more that 3%gain/year of the original price Which is inflation rate now and for builders they will have to prove CRA that they can’t charge more than 10% in profit. and for mortgage brokers fees should be only 1% for buying agent and 1% for selling agent.
    And you will see everybody lives happy.

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