Tighter Mortgage Rules May Lead to More Cheating
Tighter Mortgage Rules May Lead to More Cheating

Tighter mortgage rules may
lead to more cheating

March 30, 2010 Andy Holloway, Financial Post

Mortgage fraud may not be the most serious crime in the grand scheme of things, but it’s not something the government should be helping. But that’s exactly what real estate professionals say is a likely result of the new mortgage rules being put into place on April 19.

“There’s going to be a dramatic increase in mortgage fraud again,” says Don Campbell, president of the Real Estate Investing Network, a Calgary-based association of investors who collectively own more than $3 billion in property. “You watch this thing start to take off.”

The reason? It’s virtually impossible for investors to buy a third rental property without putting 20% down because the new Canada Mortgage and Housing Corp. rules use a 50% add-back policy instead of an 80% offset for rental income. Essentially, that means investors get less mileage from the rent that is typically used to pay off the mortgage.

The more difficult financing multiple properties becomes, the more tempting it is to cheat the system. One way to get around the rules is to not claim properties as investment vehicles. “People are going to start signing documents and say, ‘Ah, yes, I’m moving in,” or ‘This is my principal residence,’ just to get a mortgage that doesn’t require 20% down, but is 5% down,” says Campbell.

The worst, though, is that there’s very little to stop people from committing mortgage fraud. Credit bureaus do not report existing mortgage debts to financial institutions performing credit checks – although that is starting to change – and unscrupulous brokers, bankers and lawyers sometimes turn a blind eye to get the deal done.

“It’s almost like an honour system,” says Peter Kinch, a mortgage broker based in Vancouver under the Dominion Lending Centres umbrella. “It’s not just brokers. I’m shocked by the number of bankers who will say, ‘Let’s call this owner-occupied so it’ll be easier and we won’t have to go through the hassle.’ They’re getting around the rules through a lack of disclosure.”

A lack of disclosure doesn’t sound particularly heinous. Indeed, when someone does it to get a mortgage on a home – as opposed to a rental property investment – it’s called soft fraud or fraud for shelter. They may lie about their income by making up a phony T4 slip or job letter to give the appearance that they qualify for a mortgage. That’s pretty easy to catch if a banker or broker checks and a good broker will, says Kinch, because they’re representing the buyer but are also partnering with the banks issuing the mortgages.

The flip side, or fraud for profit, is where somebody has no intention of living in the house or even owning it for a long time. They’ll either flip the property quickly and often to inflate the value of the house, sometimes using phony buyers, called straw buyers, who pretend they’re moving in for a sum, usually a few thousand dollars. Identity theft is also a common way or committing property fraud.

For example, Hamilton police on March 19 arrested three people allegedly involved in a $1.2-million mortgage and loan fraud scheme using stolen identification and fake employment and income documents. The arrests came after a two-year investigation.

Mortgage fraud is generally more concentrated in larger urban areas in Quebec, Ontario, Alberta and British Columbia, especially in cities where prices have been quickly rising as mortgage rates sink. The average case of real estate fraud involves around $300,000, according to First Canadian Title, a title insurance provider based in Oakville, Ont. That compares to $1,200 for the average credit card case, estimates the RCMP. The actual amount of mortgage fraud is tough to pin down, but estimates range from $300 million to $1.5 billion a year.

There are several ways to ensure you’re not a victim of mortgage fraud, according to the Law Society of Alberta. Ask for a copy of the land title or do a historical title search at the registry office; ask to see receipts for renovations that have been said to be done; and check local property listings to make sure the asking price seems reasonable. And if you’re using a mortgage broker, make sure it’s one that is licensed by the province.

Tighter Mortgage Rules May Lead to More Cheating was last modified: April 21st, 2010 by admin

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