Condominium fraud does not start after the owners move in to their new
homes, one in five Canadians commit mortgage fraud before they walk in
the door of their new homes.
If 20% of condo owners are lying about their income and job history in
order to qualify for a mortgage that they probably do not make
enough money to afford, then it does not take much imagination to
understand why any attempts to raise the monthly maintenance
assessments face so much resistance.
One in five Canadian homeowners commits mortgage fraud, says top broker
Better Dwelling
17 February 2017
The cost of shelter in Canada has been skyrocketing for the past few
years. So much so that analysts and economists have been scratching
their heads at how it’s possible that so many Canadians can afford
homes at these prices. The answer might be simple according to mortgage
broker Scott Nazareth – fraud.
Scott, who is also the founder of Loanerr, estimates that mortgage
fraud is much higher than people would think. “Many people may not
consider ‘fraud’ the word to use for a ‘white lie’ for omissions of
information to their broker or bank” he explained. “[but] they may be
surprised to note that any wrong information on their mortgage
application is considered fraud.”
But seriously, one in five?
No, these aren’t super villain-style gangsters that dabble in mortgage
fraud when they aren’t trying to kill Spiderman. Many are regular
Canadians scrambling to get into the real estate rush, but can’t afford
it by regular standards. In fact, a lot are families trying to buy a
home before prices become so high it’s no longer a reality. Scott
estimates it’s “as high as 20%, or 1 in 5 people.” He explained
some people may “strategically try to withhold information or inflate
their income through various means.”
Those precarious employment opportunities Finance Minister Bill Morneau
is telling us to get comfortable with, seems to be a major contributor.
According to Scott, a large segment of people that commit fraud are
sales, contract, and seasonal workers. “Mortgages require at least a 2
year tenure in their job, and usually up to 3-4 years industry tenure
for a bank/credit union to consider their income as part of a mortgage
qualification… This hurdle or relative difficulty posed by
CMHC/Genworth/Canada Guaranty and Financial Institutions themselves
motivate borrowers to try and omit important employment details.”
How does it work?
How do Canadians commit mortgage fraud? Let us count the ways…actually,
a little digging revealed there are hundreds of ways so we asked Scott
to give us the three most frequent methods he keeps an eye out for. It
turns out falsifying owner occupancy, hiring a shady mortgage broker to
forge documents, and a little personal financial engineering, are the
most common.
Forging owner occupancy
If you’re purchasing a home that you plan on renting out, you generally
need to have a downpayment of 20% or more. Rapid price appreciation has
resulted in people forging owner occupancy to get around this rule.
Turns out it’s actually pretty easy to falsify whether a property is
owner-occupied or a rental, which might be why so many Canadians are
doing it. “Aside from an affidavit, there is no measure to ensure that
property is in fact owner-occupied or was intended to be owner
occupied,” explains Scott. “If someone is a first time homebuyer and
they want to buy a property with 5% down, and they don’t own another
property, if they turn around and rent the place thereafter – there is
nothing anyone can do about it.”
rogue mortgage brokers, especially in the Toronto suburb of Brampton
Shady mortgage brokers
We’ve all heard the stories about mortgage brokers that fabricate
documents to help secure a mortgage. Last year former hedge-fund
manager Marc Cohodes told us that Canada was filled with rogue mortgage
brokers, especially in the Toronto suburb of Brampton. Now mortgage
broker Scott is echoing those claims.
falsify all employment documentation
“This one disgusts me,” he explains. “but it does happen a lot in
Brampton, a shady mortgage broker may completely falsify all employment
documentation, and facilitate the transaction with a known person,
whether through the broker channel or through a bank not on the broker
channel.” He further explains “A person can request company ABC – to
create pay stubs, an employment letter – and confirm via telephone that
this person is gainfully employed, when they are not.”
“a Brampton Loan.”
In case you didn’t get that, the rogue broker fabricates a whole career
for the customer. Often the owner of the brokerage has no idea that a
broker is doing this, and it has become a problem impacting some of the
larger lenders. In 2015, Home Capital Group suspended 45 brokers,
alleging that they committed $2 billion worth of fraudulent mortgages
using similar techniques. This move has become so synonymous with the
suburb of Brampton, American fund managers have begun calling it “a
Brampton Loan.”
Shuffling debts
“People who may not be able to qualify for a mortgage based on their
debts, may ask family or friends to loan them money to pay off debts”
explains Scott. And unless your friend or family member is a bank or
credit union, this won’t show up in credit bureau. It will however,
“reduce their overall ratios in order to qualify,” Scott tells us. This
only moves the liabilities to someone else, who the shuffler will
likely default on. The rules are there for a reason.
Consequences for the borrower
There may be fines for the broker, or they may suffer internal
discipline – but ultimately you’re responsible for the circumstances
you create. “When a bank specialist/broker is really hungry for
business, and does not want to accept a “decline” from lenders – they
may entice a consumer to inflate assets or omit information,” Scott
told us. “…but in 95% of cases, consumers would have to sign off on the
information disclosed to the bank.”
Cops won’t be kicking in your door tomorrow, but there are consequences
Scott warns. “The biggest consequence is having a mortgage/debt that
you cannot afford, as it can put a daily stress on your family, and
impact your finances for the life of a mortgage.” In a hot market, your
home generally has liquidity – so default rates are low. It’s when the
market starts to experience hiccups that you might not be able to
unload that five bedroom in Orange County Oakville. That presents a few
issues if you were living paycheque to paycheque when you purchased it.
scarlett “F” on your credit portfolio
“If a lender or broker suspects mortgage fraud, they may contact the
insurers or FSCO and report the matter, which can result in your
inability to obtain financing because a “fraud” notice will appear to
any lender on your credit bureau.” noted Scott. So there’s a the
possibility of being branded with the scarlett “F” on your credit
portfolio. Although I imagine someone that just attempted to trick a
broker, isn’t above borrowing an identity from a friend.
So what do you do if you can’t afford to buy a home? Find a mortgage
broker, and be blatantly honest. Scott suggests finding a brokerage
that “focuses on transparency.” He further adds that honest brokers “do
not turn people away who do not qualify.” Instead, “we work with them
over time to educate and prepare them for the goal of homeownership.”
Yes, homeownership is a goal, not your right.
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How does a “Brampton Loan” work
The base of "Brampton Loans' are mortgage applications that shows the
lenders having false levels of income, false employment records and
fabricated savings.
The attached Licence Appeal Tribunal decision on an appeal by Pervez Tagari, a real estate broker, describes some of the methods that this scam uses.
(Please note that this decision contains some other details of fraud that go far beyond what we are discussing here.)
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The great melt
The topple of Canada’s biggest alternative mortgage lender
Vice Money
By Vanmala Subramaniam
04 May 2017
Wednesday, April 26, 2017 is a day that will forever be etched in the
memories of Home Capital Group shareholders. In a span of a few hours,
the company’s stock plunged 65 percent—it started the trading day at
$17 per share, and closed at $5.99. One of Canada’s biggest mortgage
lenders, once valued at $2.5 billion, was reduced to a mere $350
million. Thousands of Canadians were faced with a scary prospect—what’s
going to happen to my mortgage if Home Capital goes bust?
A week earlier—April 19, 2017—the Ontario Securities Commission
released a scathing report on Home Capital’s business practices. The
report, the result of an 18 month-long investigation by the OSC,
concluded that Home Capital made “materially misleading statements” to
its shareholders, blaming the decline in its mortgage business to
“external vagaries, such as seasonality and competitive markets.” In
fact, it was internal fraud that was depleting Home Capital’s
bottomline.
The OSC report sent shockwaves through a mortgage industry already
reeling from the impact of tighter lending requirements. By Friday,
April 28, investors were fleeing — the company’s high interest savings
deposit balances dropped to approximately $500 million, from $2 billion.
Investors, it turns out, were spooked by the no-holds-barred tone of
the OSC report that accused a trio of top executives at Home Capital
for deliberately covering up the fact that their employees were
committing fraud—forging incomes of mortgage applicants in order to
ensure that they would qualify for Home Capital mortgages.
Capitalizing on bad credit
Home Capital Group is the holding company of Home Trust, which provides
Canadians a range of credit options including mortgages, lines of
credit, and credit cards. Unlike borrowing from one of the big five
Canadian banks, it’s much easier for the average borrower to be
eligible for a Home Capital credit product. This is simply because Home
Capital targets Canadians who usually wouldn’t qualify for a mortgage
from a bigger lending institution like Scotiabank or TD.
In February 2015, it was discovered that more than 30 of Home Capital’s
mortgage brokers were inflating the incomes of mortgage applicants, a
practice that is called “bad underwriting”. It is estimated that these
brokers brought in $880 million worth of mortgages in 2014 alone, 10
percent of the overall number of mortgages brought in by all of Home
Capital’s brokers.
While that was big money, it was unfortunately obtained through illegal
means. When this information finally made it to the top of Home
Capital’s corporate ladder, CEO Gerald Soloway ordered an internal
investigation which resulted in the firing of 30 brokers, four
underwriters and two brokerages.
Because Home Capital’s revenue (at least for their mortgage portfolio)
was quite heavily dependent on the illegal methods of these particular
employees, the company started suffering financially. They reduced
their monetary targets dramatically, but insisted that it had nothing
to do with the income fraud mess.
They instead blamed “macroeconomic factors”. Odd, considering the
positive housing climate — booming demand, and low interest rates.
Business went on as usual, and by April 2016, Home Capital’s stock had
actually risen back up to the level it was before the fraud fiasco.
But then the OSC report came out, scorching the credibility of Home Capital’s executives.
According to contents of the report, in a mid-2015 conference call, an
analyst pushed the idea that Home Capital was on the brink of a crisis.
[“Okay. So it was –okay, so it was a little bit of teething pains. But
were you guys being a little more cautious on underwriting? I’m just
trying to get a sense of, has it been because maybe brokers have been
losing some market share, whether or not it’s been small competition
within the broker channel or to…”
Soloway replied, “None of that has changed. I think it’s very similar
to what it was last year. There isn’t a dramatic one quarter change.
There’s been no new competitor. There’s been no new change in brokers.
Brokers are exactly the same in my estimate.”]
“People knew about the fraud, it was out there in the media, but the
tipping point was the fact that management lied to their shareholders
about it,” James Thorne, a money manager at Caldwell Investment told
VICE Money. Thorne used to own a piece of Home Capital’s pie, but sold
his holdings over two years ago, after learning about its bad
underwriting practices.
“I don’t own any Canadian mortgage companies, or any Canadian banks.
There’s too much risk involved. I think people aren’t standing back and
saying look, what happened at Home Capital might be an industry-wide
problem.”
Handing out mortgages like candy
If Home Capital’s shoddy underwriting practices are indeed an isolated
incident, confined to one lending institution that in fact, makes up
less than one percent of Canada’s mortgage market, then there really
isn’t anything to fret about.
But consider a scenario where more than one financial institution
started issuing mortgages to people who potentially couldn’t afford to
pay them back.
“35 percent of the TSX is exposed to the real estate industry. Canadian
household debt is at 167 percent of disposable income. We have an
over-extended real estate market and an economy with a large amount of
leverage. And now, we have our first piece of evidence of bad
underwriting in the mortgage industry,” Thorne said.
Indeed, the Canadian Housing and Mortgage Corporation has strict rules
that govern the eligibility requirements to obtain a mortgage. But to a
large extent, the CMHC relies on compliance by lending institutions.
These lenders however, are insured by the CMHC—if you can’t afford to
make your mortgage payments for more than a year, the CMHC will step in
on your behalf. That, in a sense, gets lenders off the hook, and allows
them to take more risks by tweaking the eligibility requirements for
big loans.
“We know everyone is doing it,” a Toronto-based mortgage broker who
refused to be named told VICE Money. “I had clients who were
freelancers, and didn’t have a steady income, but I trusted they had
the financial backing of their parents so we would use their parents’
income to qualify them for a mortgage.”
This particular broker worked in tandem with a real estate agent, who
also chose not to be named. Their target market? Young Canadians,
mostly downtown Toronto renters who were keen to get a foot into the
real estate door, but had previously been rejected by the big banks for
having not met the criteria to receive a mortgage. “That’s the role of
a mortgage broker, though,” the broker told VICE Money. “It’s tough out
there for freelancers, and banks make it very difficult for people to
get mortgages. We want to help people own a home.”
“The real question is how many Canadian financial institutions are
handing out mortgages to people who shouldn’t be holding them?” asks
Thorne. “We don’t know, and that’s a problem. But having lived through
the 2007/2008 financial crisis in the U.S., I’m pretty skeptical that
only one company [Home Capital] has bad underwriting practices.”
Much ado about nothing?
According to February 2017 data from the Canadian Bankers Association,
the delinquency rate of all residential mortgages in Canada stands at
0.28 percent. There are currently 4.7 million mortgages in the Canadian
housing market — only 13,000 of those mortgages have payments overdue
by more than 365 days. At the height of the financial crisis, the
delinquency rate of U.S. residential mortgages was 11.5 percent.
Toronto realtor David Fleming brushes off the theatrics of Home Capital
pessimists. “The media loves talking about things that aren’t there.
They have accurately predicted 12 of the last two recessions,” he joked
to VICE Money over the phone.
“This is a stock market story, not a real estate story. There won’t be
any kind of huge fallout in the mortgage market. This speculation and
negativity is primarily from market bears looking for the opportunity
to short Canadian real estate.”
His views are echoed by one of Canada’s best housing economists,
Benjamin Tal. “This is not a turning point for the market. It [Home
Capital] is a very, very small segment of the market and this is
definitely not the beginning of the end like people are saying.”
Containing the fallout
There are rumblings that Home Capital’s financial situation is even
worse than what’s publicly known. At the end of April the company took
out a $2 billion line of credit from the Healthcare of Ontario Pension
Plan (HOOPP). On May 2nd, the company postponed the release of its
latest financial results to recruit new board members, in a bid to
shore up credibility, stem negative commentary, and potentially find a
buyer for its assets.
An analysis of Home Capital’s 2016 annual report shows us that as of
December 31, 2016, there were at least $23 million worth of securitized
single-family residential mortgages that were late on payments. That’s
in contrast to $7 million in 2015, perhaps a sign that more borrowers
are having difficulty making their payments.
If Home Capital gets bought out, it cannot be guaranteed that its
clients will be subject to the same terms that they currently hold
their mortgages at. Depending on how severe Home Capital’s financial
situation really is, mortgage holders could be in for a rough ride.
“Does a bank buy the mortgage assets? Or will it be a vulture hedge
fund? And what will they do with mortgages in arrears? Will they
basically put all those houses on the market to get their money back?
You’d better hope it’s a big bank, because they are much more
open-minded to helping clients,” concluded Thorne.
And then you have the hundreds of Home Capital employees whose jobs are
on the line. Regardless of whether the company actually goes broke,
there is a strong chance it will be bought out and restructured,
potentially leading to job losses.
“I know I’m not going to get my bonus this year. Within the company
they tell us everything is okay, and I guess that makes me feel a bit
better, but then I read the headlines and I get worried,” one employee
told VICE Money. The employee refused to be named for fear of being
fired by Home Capital for talking to the media.
On some level, says James Thorne, we Canadians are the architect of our own misery.
“We came out unscathed from the financial crisis, and then we started
attracting all this international capital to Toronto and Vancouver
because, look, they trusted our banking system. Let’s hope they are
right.”
With research files from Nathan Munn
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An Ode to Marc Cohodes Landlord Rescue (abridged)
By Rachelle
05 May 2017
This is in response to the backlash leveled at Marc Cohodes by Terence
Corcoran, Marc has been criticizing our vaunted Canadian real estate
market, and even calls us a banana republic. Here’s the truth, we
deserve it. There is so much rot and corruption in our real estate
market right now, I can just try to cite a few examples.
I was talking to my great friend yesterday, she met up with a mortgage
broker, he asked her and her husband what they want to pay, and he will
get them a mortgage. It will be fixed. This is what the hell we
have come to, where mortgage fraud for a million dollars is casual
lunch talk.
My owners have asked me to send blank leases to mortgage brokers so that their brokers can “help them out”
at least admit that fraud is part of that equation
Wages in Canada are flat, and house prices go up and up and up? Can we
at least admit that fraud is part of that equation? It’s not about the
outrageous egregious fraud but our soft, slow, stretching fraud on
every level. It’s about people “helping out a friend” and inflating
income $20K. Tell us more about your mom, who shops at three grocery
stores to save, “gifted” you that down payment. It’s about your cousin
who vouches for your job letter. All your friends and relatives help
you with a down payment that it will take 20 years to save other wise
or maybe a bit more serious fraud.
I wrote about my friend in 2010 who was with Accredited Home Lenders
and his mortgage was not renewed. You know who he ended up getting a
mortgage with? TD Canada Trust that’s who.
Fraud is like an iceberg
Do you see how much of that fraud is running below the surface ? Even
when I talk to people about rental applications I’m listening for small
lies, because where there’s one cockroach there’s sure to be many more
hidden, dirty, like greasy grimy sickness spreading.
Home Capital Group, FSCO, and their colossal leadership failure
When Home Capital discovered that their mortgage broker channel was
compromised they had a duty to disclose. Those 45 brokers should have
been sanctioned by FSCO. They were not. In fact to my knowledge they
are all still working in the industry.
Curiously, here is one of their board of directors resigning days
before the announcement that the mortgage brokers were fired. That
surely doesn’t mean anything, right Mr Corcoran? Just a coincidence?
OSC is a joke regulator
When I was involved in the League REIT Ponzi I did a lot of work with
the investors who had been scammed. One of those things was going to
the OSC and sending evidence to the OSC. Every investor was to send
their facts to their provincial regulator, and they would cooperate
with the main investigator the BCSC. I was part of this misinformation
campaign to get people to submit their documents. Later I found the the
OSC did not cooperate with the BCSC and share documents so nothing was
ever done, and those criminals that stole $370,000.000 from widows and
orphans, went unpunished. The principals of First Leaside, another
Ponzi here in Toronto, had to pay millions of dollars in fines.
My naivete was stripped away, and I have very very low expectations of
OSC competence, and nothing I have seen yet, has convinced me
otherwise. So when they do something, can we all stand up and applaud
these spineless example of prosecutorial timidity?
They could at least try to send some of these crooks to actual jail
after they prey on seniors and rape retirement funds for their unjust
enrichment. These are complex cases that cost hundreds of thousands to
prosecute, but I don’t care. Lets some suits wear some metal bracelets
for stealing from granny and maybe the word will get around, the
criminals don’t pay their fines anyway, maybe we need to get a little
more serious.
The fact that OSC charged the executive of Home Capital Group with
anything speaks volumes. The fact that they wouldn’t accept a plea from
Soloway, but wanted to charge five executives speaks volumes.
OSC charged Home Capital Group with bullshit charges, but everyone who
knows anything, knows its a big deal and that’s why their depositors
pulled their money.
Al Capone didn’t go to jail for being a mobster, killing people,
stealing money, or smuggling liquor, he went to jail for tax evasion,
because that could be proven and the rest is history. I don’t evict
tenants for disturbing the peace when I can evict them on non payment
of rent. Capisce?
