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.”