It’s easy to get angry at the banks when it’s hard to find a low-interest mortgage. After all, the vast majority of people who apply for mortgages have every intention of being honest with their paperwork and paying their mortgage each month on time. When the banks got out of control in the years before 2007, approving loans without doing enough due diligence, another part of the truth is that the people who ended up having to get modifications or going into default also made financial choices when signing their mortgages that they shouldn’t have.
Mortgage Fraud Statistics in Canada
In the years since 2007 and 2008, the Canadian government has instituted regulations to make it more difficult for banks to lend to people who have limited resources. However, this hasn’t stopped people from applying for loans they can’t afford. In fact, as banks have tightened their rules, some applicants have become more creative in the ways that they stretch the truth when putting their applications together.
In Canada, no nationwide tally of mortgage fraud is maintained anywhere. However, a few years ago, the Bank of Montreal went public with some irregularities it detected in some loans sold in Alberta. In 2012, the bank filed a lawsuit alleging a huge mortgage fraud scheme. Not only were applicants involved, but also attorneys, mortgage brokers and four of the employees of the bank. The damage reached as high as a Member of Parliament from Calgary. All in all, the bank lost $30 million after advancing about $70 million in funds for mortgages.
The size and complexity of this scheme are what set it apart. However, mortgage fraud involving individual borrowers reaches into the hundreds of millions of dollars each year, according to some estimates. In a bullish market like the Canadian real estate market, it’s easier to keep selling mortgages and cover up the losses with new profits than it is to put more safeguards in place.
One type of fraud is to buy an inexpensive home in a good area and then use an agent, lawyer or other real estate pro to “sell” the house to a straw buyer, or anyone who can be talked into applying for mortgages with fake credit documents and income history after a payoff of a couple thousand dollars. The bank lends the money, the swindlers take the money, and the straw buyers stay on the hook. By the time the bank catches wind of the situation by foreclosing on the house, there are no real people left to go after, and the house is just worth a percentage of what the bank has put into it.
Some other instances of fraud, particularly in the United States, have to do with falsifications on mortgage applications. For example, the U.S. entity Fannie Mae found that, of all of the fraudulent mortgages originated in 2013, 62 percent understated their liabilities in order to get more financing. Six percent falsified income. Credit fraud was virtually nil, thanks to the reliability of credit bureaus. However, falsification of this nature makes default more likely and elevates the risks that banks face.