Mortgage fraud is one of the major problems facing lending institutions in western Canada — and throughout the West. In the face of tightening regulations from the banks, unscrupulous people are trying multiple schemes to defraud the banks of money. One of the most insidious types of scams involves the use of a “straw buyer” to complete a fake mortgage.
What Buyers Need to be Aware of
Here’s how the process works. A “straw buyer” is someone making a purchase on someone else’s behalf. The straw buyer comes into play when the real buyer can’t finish the process for one reason or another. With a home purchase, the real buyer usually can’t qualify for the mortgage and so he uses the credit of the straw buyer. Using a straw buyer isn’t necessarily against the law. However, if any of the parties is knowingly entering into the deal to commit fraud, or the straw buyer is acting for someone who is legally forbidden to make that purchase, then this process becoming unethical and downright illegal. Even when the process is done honestly, banks don’t like it because the deal makes default more likely, but the bank isn’t aware of it. For the straw buyer, the process is also dangerous, because if the mortgage goes into default, they can be left liable for the debt that they have assumed, even though the real buyer is the one living in the house. Some real buyers try to compensate for these risks by offering the straw buyers cash up front or a significant return upon the sale of the property.
So how can you protect yourself from the dangers of fraud when you’re buying a home or refinancing an existing loan? When things are right, a promise of finding “easy money” can be tempting. However, if you misrepresent your circumstances knowingly, you’re committing fraud, and anyone who helps you is doing the same thing. Examples of this include:
Indicating that you are a full-time or salaried employee of a company when your status is really part-time, hourly, contract or commission-based, or if you are self-employed;
Buying a rental property and indicating that it is owner-occupied;
Concealing other mortgage obligations or other forms of debt during the application process;
Misrepresenting any details about the property or leaving out other information to alter the value of the property;
Inflating your stated income or length of tenure with your current employer, or making misleading statements about your position;
Misrepresenting the source or amount of your down payment;
Adding co-borrowers to the application who do not plan to live in the home and do not plan to assume a share of the responsibility for the loan.
According to Canadian law, any borrower who falsifies information, and any straw buyer who permits the purchase of a home in his name are all committing mortgage fraud. If the property goes into default, they will be considered financially liable. Criminal prosecution is also a possibility.
To avoid these potential problems, here are some precautions for you and your family to take. These include:
Reading legal documents thoroughly and understanding them before signing them and, if necessary, gaining a second legal opinion and, when necessary, using a translator;
Using accredited or licensed real estate and mortgage professionals to handle transactions and knowing the people you’re dealing with;
Signing mortgage documents only when you intend to purchase a particular property and only using personal information on mortgages that you plan to take responsibility for;
Providing true and accurate information when completing a mortgage application;
Seeking independent legal counsel from your own attorney, particularly in the areas of title insurance and other forms of protection;
Performing due diligence through the local provincial Land Titles Office to acquire a sales history of a property you are interested in purchasing, and considering having a professional appraisal and home inspection performed, as professional appraisals have access to the property’s MLS and sales history;
Remembering that offers sounding too good to be true generally are.
If you become aware of mortgage fraud, it’s important to protect the potential victims. Please get in touch with the local police or the Canadian Anti-Fraud Centre. The Canadian Association of Accredited Mortgage Professionals (CAAMP) has information about preventing mortgage fraud at their website: http://mortgageconsumer.org/protect-yourself-from-real-estate-fraud. At Amansad Financial, we don’t work with straw buyers or other shady mortgage practices, and we report any suspected cases of malfeasance.