On the weekend, The Globe and Mail published a massively good piece on Canada’s mortgage fraud problem. In it, real estate reporter Tamsin McMahon outlined all sorts of sordid things mortgage brokers do in order to get a deal done, including:
- Falsifying pay stubs, job letters, and other sources of income
- Creating fictitious companies (and paperwork) which allow clients to qualify
- Charging up-front fees to apply for mortgages, with the implied understanding the fee goes towards falsifying documents
- Faking credit reports and income verification from CRA
This is perhaps the most damning quote. From the Globe story:
“In August, researchers at Veritas Investment Research visited 10 Toronto-area mortgage brokers, posing as buyers who were employed full-time and had a good credit rating, but were looking to take on more mortgage debt than they would qualify for under current rules. They offered to get fake employment letters from a relative who owned a business saying they also worked for him part-time.
Three brokers suggested they could get the deal approved through a “B lender,” or one specializing in subprime borrowers, including one broker who suggested the family member process a fake pay stub to include with the application. “This, of course, would only be acceptable for an upfront fee to the broker,” wrote investment analyst Mike Rizvanovic.”
Related: Robb from Boomer and Echo wrote about this yesterday. His piece is worth a read too.
Essentially, it boils down to this. Most mortgage brokers are pretty honest folks. Sure, they’re looking to get deals done because that’s how they get paid, but most would never engage in outright fraud. Remember, in that quote above, only three of the ten brokers visited by Veritas actually played the game. Presumably, seven shut the door on the pretend fraudsters immediately.
And if you click through to the Globe story, one of the people featured committing the fraud was an employee of TD Bank. (Amazingly, he’s back being a broker these days, even though he was sued [eventually settling out of court] by a former client. The chutzpah is amazing.) Bank employees don’t do this kind of stuff as often as brokers, but they’re hardly innocent.
After reading the Globe’s piece, I realized I had never really laid out what kind of mortgage fraud I saw in the business. Allow me to present a first-hand view of what I saw going on in the industry when I was a broker from 2007 to 2010.
Related: I wrote a long-ass piece on getting a mortgage in Canada.
All the co-signers
This one has been going on for years, and I’ll admit I did it at least once.
Here’s how it works. Buddy applies for the mortgage and can’t qualify because he either doesn’t make enough, has too much debt to fit inside of the ratios, or has a bruised credit score. The person in this situation actually had all three of these going against him.
So we got a co-signer, a relative who made a decent amount of income. This relative was there in name only. He had a sizable debt load of his own, and there was no way either guy could afford the house on his own. But together, they qualified, and the bank was happy.
Borrowing down payments
This is another very common form of mortgage fraud. It works in two different ways.
The first is when a borrower gets the down payment from a relative. Now this is fairly common, since parents feel the need to help junior buy his first place. As long as the relative signs a letter saying there’s no expectation for repayment, the bank is happy to accept it as is.
What happens often is there is an expectation for repayment behind the scenes. This obviously affects the borrower’s ability to pay back the mortgage.
The other way people borrow down payments is they will raid a line of credit and then hold the cash for three months in a savings account. That way they can show the lender a pattern of savings (all lenders ask for is three months of bank statements) and don’t have to disclose what they borrowed the money for. Since lines of credit come with low minimum payment requirements, borrowing that way doesn’t skew the ratios much.
The easy way to falsify documents
There’s a much easier way to falsify income documents when committing mortgage fraud. Just get your boss in on the action.
I can think of easily 4-5 mortgages I did where the borrower told me one income amount and the job letter came in with a higher number. Now remember, I come from a small town. I’d often know the letter writer personally. It wasn’t that they were necessarily trying to screw the bank, they just wanted their employee to be able to qualify.
Suddenly, bonuses became guaranteed and 32-hour work weeks became 40-hour ones. Overtime became an expectation as well. As long as it jived with the provided pay stubs, lenders didn’t bat an eye.
It’s not like that really mattered. I talked to several of the bosses who signed these letters, and they never got calls from the lender. Lenders would Google the company to make sure it existed and that was about it.
Self employed fraud
To qualify for a mortgage as a self-employed person, you need two years as working for yourself. There’s probably a legitimate argument for saying that’s an arbitrary number, but it’s what the self-employed have to deal with.
There’s an easy way around that — just say you’ve been self-employed longer than you really have. I saw somebody who I thought was in business for themselves for 19 months who was suddenly doing it for 26 months. When I asked the question I was told I was “mistaken.”
At that point the bank will use two years of Notice of Assessments to determine the applicant’s income. As long as they average out to an acceptable number and CMHC will insure the mortgage, the bank doesn’t care.
I’ll explain this one by telling the story of when I bought my house in 2008.
I paid $210,000 for the place, and I had the $42,000 sitting in cash ready for the 20% down payment. I submitted the mortgage to a lender that specialized in self-employed folks (a prime lender, not a subprime one) and my underwriter said CMHC only thought the place was worth $200,000.
I pointed out the place had upgrades inside and out and was in a desired neighborhood. CHMC responded by increasing the value to $205,000. That’s how easy it was to game CHMC for an extra $5,000 in value.
I then faced a choice. I needed to come up with an extra $5,000 or have slightly less than 20% equity in the place, which would have forced me to pay mortgage default insurance. I did what was easiest — I borrowed the money from my parents. The money got placed in my account without the need to come up with updated bank statements or a gift letter from them. The bank didn’t ask any questions about how I came up with it.
The bottom line
Mortgage fraud is everywhere. It ranges from fairly innocent stuff to the kinds of things that send people to jail. It’s a problem, especially in an industry based on commission. But the fact is mortgage fraud is always going to exist. It’s human nature to fudge the numbers a little on the most important purchase of someone’s life.
Some of the stuff is relatively innocent, while some isn’t. Some is done with altruistic intentions. Mortgage fraud is a problem, that much is obvious. And it’s probably worse now than what it was ten years ago. But we’re all naive as hell if we think it’s going to go away or it’s just a Canadian housing bubble phenomenon. It’ll always exist, especially through the broker channel.