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The Bank of Montreal is suing hundreds of people in Alberta, including lawyers, mortgage brokers and even some of it’s own employees as the bank has uncovered a huge alleged mortgage fraud operation.

Here’s the way it worked. The fraudsters would find the crappiest house in a nice neighborhood and buy it at a reasonable price. They would then resell it to someone else (referred to as a straw buyer) who was typically a new immigrant to Canada. The fraudsters would convince the bank the property was worth much more than it was because of the neighborhood it was in.

The fraudsters would then falsify income and net worth statements of the new mortgagor so they would qualify for the inflated mortgage. The borrower would get a few thousand dollars for his trouble. Once the fraudsters got paid out, they would pocket the difference and leave the new borrower holding a loan on a house that wasn’t worth what he paid for it and with a payment he couldn’t afford. It doesn’t take a genius to figure out what happened next.

How does the fraud work? The fraudsters had a decent knowledge of internal bank procedures, knowing how they could exploit CMHC guidelines. The bank gives the property info to CMHC, who gives the property either a thumbs up or down. They know which properties will get past the database, exploiting that knowledge into getting fraudulent mortgages.

Having the lawyer on board is a huge part of the scheme as well. The lawyer submits the price paid for the property to land titles for the first purchase, inflating it so the second purchase doesn’t seem so out of line. One of the internal controls of the bank is to look on the existing title of the property to see if someone is paying an inflated value on a purchase.

One of the more interesting aspects to this case is one of the defendants named, Calgary MP Devinder Shory. He was the lawyer of record for 4 of more than the 200 total properties in total.  He’s obviously not happy about this.

It makes one wonder whether this is happening all over Canada and just how big this scam really is. Stay tuned folks, this could get downright interesting.

Tell everyone, yo!