In Canada, as in the United States, the mortgage system, while being important to the overall functioning of the economy, is also one that has the potential to experience fraudulent behavior (Baumer). Whenever there is a possibility for people to take advantage of the system and make money, there will be a chance for fraud (Benson & Simpson). Likewise, the possibility of fraud goes up whenever the possibility of being caught goes down. For one reason or another, people believe that they can get away with mortgage fraud (Carrayannis). With this in mind, this has become a major problem, and there are a few remedies that can be provided for those who seek to deal with the issue. While the US has seen lots of different problems with its mortgage system, it is Canada that has truly incurred more risk to its financial system as a result of mortgage fraud (Spicer). In fact, this has become such a major problem that many economists within Canada have suggested that the country’s credit rating will be revised and its banking system could be on the edge of disaster. To understand what can be done about this and the true nature of the risk it presents to the economy, one must begin by understanding mortgage fraud, how it is done, and what people how to achieve whenever they undertake it.
Mortgage fraud is the choice on the part of a consumer to either lie about information on a mortgage application of omit information (Innocente). The idea behind it is that they are seeking to obtain a mortgage they would otherwise not get, or they are seeking to get a much lower rate than they would have otherwise gotten, as a result of the fraudulent behavior they are undertaking (Basiri & Mahmoudi). Ultimately with mortgages, there are many different things that the bank is going to ask the average person before handing out this type of loan. The long-term commitment of the loan along with the massive amount of money being lent means that banks need to do their due diligence before handing out the cash. On top of that, mortgages bring about big risks to banks because home prices can crater, causing banks to then hold an asset that is worth significantly less than what the bank has lent to the customer. One of the things that banks ask for in their loan applications is the employment status of individuals. Some people may fib on how long they have worked for a given company. Some might overinflate their salaries to make it seem like they make more money than they actually do. The problem is especially large for people who are self-employed. Because self-employment allows one the opportunity to create his or her own records, it is also an opportunity to commit fraud. This is why many banks are more skeptical of people who work on their own in comparison to people who hold down jobs with established companies. Some can also lie about their credit histories, about their combined level of income, and about other relevant factors. If it is relevant to the determination of whether a person can get a loan or what rate a person will have, then it is fair game for the frauds and cheats who seek to game the system by providing information that is less than truthful.
It is impossible to know exactly how many people in Canada have committed mortgage fraud. These cases are not always discovered and they are reported even less than that. With this in mind, all of the statistics on the matter tend to be estimates taken from incomplete information. In addition to the estimates that are taken, there are other critical elements to keep in mind. Namely, not all mortgage fraud is created equally. A person who fibs about how long they have been working with their employer is not the same as the person who signs a mortgage after lying about their income and how many other properties they own. This means that simply taking the raw number on mortgage fraud is probably not the best way to determine what has taken place. With this in mind, there are some who have suggested of late that as many as one in every five mortgages in Canada has been given out as a result of some kind of fraud. This suggests that the problem is very prevalent, in fact, there may be a misunderstanding among consumers about the seriousness of the matter and the need to be completely truthful in their applications. Critically, this percentage being so high has forced some analysts to make predictions that the entire banking and financial system could be at risk in the future unless something is done to add more protections for mortgage lenders against the fraudulent behavior of individuals. In addition, one common type of fraud occurs when the value of the property is artificially inflated through a series of fake or contrived sales between a homeowner and an associated party. A loan can then be obtained to cover the higher than market rate of the home, essentially defrauding the mortgage lender by allowing the borrower to get more money than the home is worth. The borrower can then potentially profit from this scheme by allowing the home loan to default and claiming the money that was lent.
In looking at the harm that is caused, one has to look at direct harm as well as indirect harm. Directly, the entities harmed are the banks. They hand out the loans, and when they do so, they do it based upon a risk profile (Dodge & Steele 289). They come up with models to account for risk, and they have to price their loans accordingly. While there is some built-in calculation taking into account the risk of fraud, it is highly unlikely that lenders in Canada have been building a 20% number for fraud into their models. This means that they have likely been handing out home loans that have a chance of causing them to go under. The problem with mortgage fraud is that it not only hurts the bank that hands out the loans. It also hurts the homeowner. He may think that he is getting a better rate or getting a loan he would not have otherwise gotten, and this is a good thing. In reality, he is getting a loan that he cannot afford, and this cannot be considered to be a good thing. If a person is getting a loan that is over his head from a financial perspective, then it is only a matter of time before he or she cannot pay the loan. This will mean that the home is repossessed, the person is out of the house, and everyone loses money. On top of that, the entire economy and housing market is affected, which means that mortgage loan fraud is pervasive problem nationally. When loans are propped up by mortgage fraud, this means that the demand for homes is artificially high. Whenever the problem is fixed, then fewer people will be able to afford the homes. This means that fewer people will be buying, which then means that the market is much softer than it may seem. People who have purchased homes based upon the idea that the market is operating in a free and fair manner are going to be harmed because the price of their home may decline if the market itself goes under. There have been many examples where fraud has been encouraged in the US. For instance, in the lead-up to the global financial crisis, people were committing fraud left and right. This led to a breakdown in the US housing market, and it caused people who were trying to be honest to also lose their homes as a result. The issue can bring down the entire economy, causing pain and destruction across Canada.
There are a few remedies that allow for aggrieved parties to be compensated as a result of what has taken place (Young 469). First, there have been cases in Toronto and other hot markets in Canada where people have actually been arrested for mortgage fraud. They have faced significant penalties as a result of the fraud, going to prison for their crimes. This is seen as one of the chief deterrents that seeks to get people to behave lawfully in regard to their home loans. These penalties are mostly reserved for those who are running complicated schemes that seek to defraud the public and specific parties. Run of the mill, individual fraudsters are less likely to be prosecuted for these crimes. Another potential remedy is civil (Myers). Some courts have been willing to restore the title of a home that was fraudulently purchased to the person who was harmed in the situation. These sorts of equitable remedies are the things that many law firms have been looking at in advising their clients on the situation at large. At current, there are also many government actors who are looking to pass laws to help with this problem. Because it is the kind of problem that is so massive in scope, it is something that has to have a remedy in the not-distant future if the economy and the housing market in Canada are going to remain strong and stable.
Ultimately there is one thing about mortgage fraud that is vexing to many who study it. Namely, if the problem is so pervasive, then why is it not reported on more? Why does the public know so little about this issue? The problem is sitting right out there, waiting to bring down the Canadian housing market, burst the bubble in hot cities, and threaten the rule of law, so why have people not heard more about these cases? The easy answer is that mortgage fraud is hard to detect. The nature of fraud is such that the people who do it are very good at concealing what they have done. This means that it is hardly ever discovered when it is done right. In addition to that, going after people for mortgage fraud puts the entire system at risk. Even if banks figure out what has taken place, they stand to lose too much by exposing this because they are very exposed in these housing markets (Stamler). If people discover that the housing market is build on a veritable house of cards, then the prices in that market will crater. For banks that are holding loans on these homes at potentially inflated prices, few things would be worse than a mass hysteria on the real estate market that helps to drive prices lower and lower. The best thing for banks to do is to just maintain the status quo while trying to put in more safeguards against this fraud in the future. This can then enable the banks to come out ahead in the end. For the time being, though, the Canadian housing market may be a constant state of flux.
- Basiri, Kiana, and Babak Mahmoudi. “Possible Income Misstatement on Mortgage Loan Applications: Evidence from the Canadian Housing Market.” (2018).
- Baumer, Eric P., et al. “Illuminating a Dark Side of the American Dream: Assessing the Prevalence and Predictors of Mortgage Fraud across US Counties.” American Journal of Sociology 123.2 (2017): 549-603.
- Benson, Michael L., and Sally S. Simpson. Understanding white-collar crime: An opportunity perspective. Routledge, 2014.
- Carayannis, Elias G., and Ali Pirzadeh. “Prevailing Culture and Narratives for Constructing Reality: Case Study of Economic Crisis.” The Knowledge of Culture and the Culture of Knowledge. Palgrave Macmillan, London, 2014. 111-142.
- Dodge, Mary, and Skylar Steele. “A comprehensive framework for conceptualizing financial frauds and victimization.” The Routledge International Handbook of the Crimes of the Powerful (2015): 289.
- Innocente, Nathan. The Perfect Storm: Institutional and Organizational Antecedents of Title Fraud in Ontario. Diss. 2017.
- Myers, Linda Brandt. “The Fraud Fighters.” Cornell Law Forum. Vol. 41. 2015.
- Spicer, Ronald. Explanatory Case Study on Factors that Contribute to the Commission of Financial Fraud. Northcentral University, 2016.
- Stamler, Rodney T., Hans J. Marschdorf, and Mario Possamai. Fraud Prevention and Detection: Warning Signs and the Red Flag System. CRC Press, 2014.
- Young, Simon NM. “Disproportionality in Asset Recovery: Recent Cases in the UK and Hong Kong.” The Palgrave Handbook of Criminal and Terrorism Financing Law. Palgrave Macmillan, Cham, 2018. 469-489.