What follows is a summary of the issue and its scope, an overview of the mortgage process and current opportunities for fraud to occur, and information about how it can occur and what you can do about it if you are a victim.
The Scope of the Problem
Recent experience in the United States and Canada has shown that fraud, ubiquitous within the mortgage insurance industry, is beginning to grow rapidly and create significant losses."
It is unknown how closely the Canadian experience mirrors the American situation however published reports indicate mortgage fraud is on the increase in Canada and the losses suffered should cause everyone to be concerned.
Mortgage fraud is defined as the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan. This common type of fraud affects everyone because it leads to inflated property values and higher property taxes. In America's case, the increase in mortgage fraud is contributing to the subprime mortgage crisis.
Fraud for property is usually committed by people who overstate their income or lie about their credit history, but who generally still intend to pay off their mortgages. Fraud for profit and fraud for criminal enterprise, on the other hand, are usually the more serious crimes because they involve elaborate schemes where the intent is to illicitly gain proceeds from property sales.
According to a Criminal Intelligence Service Canada report titled Mortgage Fraud and Organized Crime in Canada, "losses from mortgage fraud in Canada range into the hundreds of millions of dollars annually.Fraud-related losses in Canada are expected to increase.
Why So Much Fraud and Why Now?
The business climate for selling and buying homes is faster, easier, more impersonal and more competitive than ever before. This contributes to the current opportunities for fraud.
In the contemporary real estate market, if you can’t quickly obtain a mortgage loan – or if you can’t sell your home quickly enough – then it’s easy for you to take your business to someone who will expedite the process for you.
Nowadays there is an increasingly impersonal real estate market that generates a large volume of work, processes applications as quickly as possible, and allows for the relatively quick exchange of property and large amounts of money – much of it done electronically. Taken together, all of these factors combine to provide a rich target for fraudsters.
In this type of transaction, numerous parties are involved – many never know or actually meet each other in person. Without due diligence throughout the process, it is easy for fraudsters to pass themselves off and to take advantage of the lack of oversight.
As well, the housing market has been extremely hot for many years and the situation does not appear to be easing up. Buyers and sellers are constantly pressured to make important and expensive decisions at the drop of a hat in order to take advantage of an opportunity to make money or buy a dream home.
The money lending business is increasingly competitive. If a lender turns you down, there are numerous mortgage brokers, private investors and others who are more than willing to step in. Years ago, it was common for clients to approach their bank or trust company with whom they had a longstanding business relationship to get a mortgage. Today, clients do not have to rely on the institution where they bank. In fact, nowadays lenders take many shapes and forms and are often willing to undercut their competitors, whether on price, conditions of lending or due diligence.
Consumers are likely to go with whoever offers the best deal.
Changing technologies and lenders’ business strategies have made it possible for people to make online applications that do not require anyone to witness key signatures. It is common now for a purchaser to apply for a mortgage at a lending institution where the purchaser does not already have an account.
Lenders are increasingly receiving documents and mortgage applications from brokers, real estate agents, and lawyers who may be unfamiliar to them.
Whereas lenders once knew the clients who walked through their office doors, today a lot of mortgage applications are received from offsite representatives of the lenders. Mortgage representatives may have a hands-off relationship with the lenders they represent – to say nothing of the relationship between the lenders and clients of their offsite representatives. In some cases, lenders do not have contracts with mortgage brokers or representatives that would require front-end verification of identity and application information.
The impersonal nature of the relationships at the beginning of the process raises identification issues at the end of the process. For example, in some cases, by the time a lawyer obtains a purchaser’s identification, some form of identity fraud has already been perpetrated.
If a lawyer is able to determine the use of a false ID before mortgage funds are advanced, then the lawyer must – since the lawyer is retained by the lender – inform the lender about the false ID, which should prevent a mortgage transaction from going through. However, all too frequently fraudsters are presenting lawyers with credible identification.
The pressure to close a deal, based on tight time frames, does not facilitate a thorough scrutiny of all aspects of the deal or allow ample opportunity to reopen a deal. To protect against mortgage fraud, due diligence must be practiced by all parties at every stage of the process. That said, the lawyer only has access to certain information and the lawyer’s due diligence may not uncover a fraud that has occurred at the front end of the transaction.
If identity fraud has already occurred, it is that much more difficult for someone at the end of the process to detect it. In a 1996 case, Yamada v. Mock, (a Canadian case) the court found that the law requires the lawyer to ask for identification. At the same time, the court recognized that a lawyer should not be "expected to act as guarantor" that the person submitting identification is not an imposter.
Value fraud is made possible in part because there are no established processes for ordering and reviewing appraisals. In some cases, fraudsters misrepresent the purchase price of a house with confidence, knowing the mortgage loan is less than 50 per cent of the value of the house and therefore only a cursory appraisal will be done, if any at all.
These days, appraisals, if done, usually rely on computer modeling. Basically, someone sits down at a computer and checks to see the selling prices of houses in a neighborhood. If the price of the house is in line with neighborhood home values, further inquiries are not deemed necessary. If there have been a number of flip deals, it is easy to artificially inflate the value of homes in a neighborhood. In this case, there are no warning signs that a house is selling for a price higher than its market value and further checks are not typically done.
Recent changes to the technology for gaining access to Ontario’s land registry system have presented another avenue for fraud. Ontario is the first jurisdiction in the world to provide electronic registration of land-related documents. In addition, the land registry system and its information can be accessed remotely by computers.
Lawyers and other industry professionals must register with the company that created the online registry, Teranet, to obtain special encrypted diskettes that allow access to the land registry system. The system has an electronic audit trail that identifies transaction activity leading back to the user and his or her registered diskette. Both lawyers and non-lawyers can have access to diskettes.
Lost, sold, or stolen diskettes provide keys for fraudsters to access the electronic system. Once they have access to the system, fraudsters can perform any number of phony title transfers or fraudulent mortgage discharges. They can then present these fraudulent documents to lawyers and lenders, asking for a mortgage on a property that the fraudster appears to own. The ability to search addresses electronically and obtain title documents facilitates fraudsters obtaining credible information to assist them perpetrating a fraud by stealing the home on paper.
Fraudulent transactions often share common elements. Most common types of fraud include identity fraud and value fraud.
Identity Fraud
Here is a typical scenario. A consumer purchases a home. A fraudster in the neighborhood takes down the street number and accesses the electronic registration system and finds who is listed as holding title to the property, along with the details of any mortgage arrangements. The fraudster has obtained a diskette that allows access to the electronic registration system. The fraudster transfers the title and pays the registration fee and the applicable land transfer tax. Now the fraudster has title to someone else’s home.
Just as easily, the fraudster gets rid of the mortgage registered on title by electronically creating and registering a discharge of the mortgage indicating that the mortgage has been paid off.
The fraudster goes to a lender and asks for a mortgage worth only half of the home’s value----$100,000. Since his request for a mortgage loan is only half of the home’s worth, the lender forgoes an appraisal of the house.
The lender asks the fraudster’s lawyer to obtain the purchaser’s driving license. The lawyer finds that it is indeed the license of the person he is dealing with. It is the same person whose name is registered on title, which is showing that it is free of any encumbrances such as another mortgage on the home.
Seven days later, the lender gives the lawyer of the fraudster who knows nothing about the fraud, the $100,000. The unsuspecting lawyer completes the mortgage work and releases the mortgage funds to his client, the fraudster. Within months, the fraudster stops paying the mortgage. Now the lender is wondering what is happening and contacts the original homeowner. The unwitting lawyer, in the meantime, will be investigated by the police and the authorities that govern lawyers.
There are many variations of identity fraud.
The fraudster, for example, may have faked employment records. When the lender calls to check references, the caller is re-routed to the fraudster’s cell phone or a "phone boiler room," owned by the fraudster, where many persons answer phones for many non-existent employers. The people who answer the phone verify the fraudster is an employee and confirm salary information.
In yet another example, the fraudster might pose as a lawyer representing a fictitious purchaser. The lender releases mortgage funds and instead of directing the funds to the fictitious purchaser and non-existent vendor, the fraudster reroutes them into an offshore personal bank account.
The electronic nature of the real estate business contributes to the ability to engage in identity fraud, because increasingly no signatures are required – just access to a computer and a Teranet access disk.
Value Fraud
In these types of schemes, the true value of the property is artificially inflated to deceive the mortgage lender. This is accomplished in one of two ways, either through "flip" deals or misrepresentations of the original purchase price. For example, a fraudster offers to buy a home from a consumer for $200,000. An Offer to Purchase is signed.
The fraudster then arranges for another purchaser (Purchaser Two) to purchase the same property at a purchase price of $400,000. A lawyer is retained to act for both the fraudster and Purchaser Two in the second transaction. Purchaser Two then applies to a bank for a high ratio mortgage (95 % of $400,000) and the bank approves Purchaser Two for a mortgage of $380,000. Both transactions close on the same day.
The fraudster and Purchaser Two instruct the lawyer to change the deed delivered by the original owner to show the higher consideration of $400,000. On closing, a portion of the mortgage proceeds is used to complete the first transaction and the balance or excess is paid to the fraudster and/or Purchaser Two.
After closing the fraudster and/or Purchaser Two may reside in the property for a period of time and make the mortgage payments. At a certain point, Purchaser Two or the fraudster stop making the mortgage payments. The bank sells the property under power of sale and the bank is unable to realize the full amount owing on the mortgage because it has over-advanced approximately $190,000.
A variant of the value fraud is a misrepresentation of a home’s purchase price, indicating a higher purchase price than the actual purchase price. For example, a purchaser agrees to buy a house for $200,000. The purchaser applies to the lender for a $150,000 mortgage. On the closing day, the vendor gives the purchaser a credit of $50,000 against the purchase price because of substantial renovations to be made to the home. The purchaser does not tell the lender about this credit, however, and the lender advances the full $150,000 mortgage for the home.
Even if all lawyer involvement in mortgage fraud – whether as dupes or otherwise – ended today, the potential for mortgage fraud would remain so long as opportunities for fraud exist elsewhere in the mortgage lending process. Increasingly, lawyers are less involved in the entire real estate transaction and those perpetrating fraud are able to do so before a lawyer is involved.
Those looking to commit fraud would probably rather not have any lawyers involved simply because lawyers can act as a check at the back end of the process.
The Consequences of Fraud
Who loses in these frauds? Everyone does. Certainly lenders and insurers bear the brunt of the financial losses, but the losses of mortgage insurers and title insurers may typically be recovered from consumers in the form of increased mortgage insurance premiums. Consumers also lose when they have to spend time, effort, and legal fees to recover lost title to their homes.
And of course there is a non-monetary impact of fraud: real estate fraud reflects negatively on everyone involved in the real estate industry. It damages the professional credibility and reputations of mortgage industry professionals, realtors and lawyers who do not participate in the fraud or condone fraudulent activity. That’s why lawyers are working with others in the system to make people aware of ways to prevent fraudulent activity and to investigate allegations of fraud.
If you are the victim of a fraudulent transaction with respect to a mortgage being made in your name or the name of someone else and you didn’t know of the transaction and you don’t pay off the mortgage your home can be sold and you won’t even know that it has been sold until the new owner shows up with all his belongings and furniture to move in.
And when you tell the new owner that you are the owner and he can’t move in, the police will be called and the mover may end up taking all of your belongings and furniture out of your home and move the new owner and his belongings and furniture into your home.
Consumers should remember that the lawyer is there to protect their interest in a situation such as I have described. Given the size of the transaction and the relative increase in cost, consumers will get good value from a lawyer to advise on the illegal transaction and the bank’s lack of due diligence.
In Canada, you will probably get your home back and not have to pay off the mortgage because the bank failed to do due diligence but meanwhile you will have to pay a lawyer big bucks to get everything back to what it was before the fraudster entered your life.
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