BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

It happens everywhere but it hits hardest when you find out about it so close to home. There have been various cases of mortgage fraud detected on the BC Sunshine Coast. It’s a serious white-collar offence that calls for severe penalties.

How can you benefit at the expense of others? When greed rules, many people lose sight of what's right or even of what's legal. Here comes mortgage fraud!

Fraud, as an intentional deception made for personal gain is so widespread in our society that most cases of fraud go unnoticed. We might be surprised how common that is. Although mortgage fraud isn’t particularly constructive, there are people who’ll brag about how they scored one against the bank, as if that’s a worthy achievement and not at all a crime. Well actually, it’s quite serious an offence – nothing to be too proud of.

Since real estate involves a large amount of money, it will always attract those that may engage in fraudulent acts. A form a fraud is suspected in a large number of real estate transactions, where the most common form of real estate fraud has to do with fudging one’s mortgage application. It’s a very dangerous practice that should be seen as a criminal act; it may land you in serious trouble. Most mortgage applications actually contain an element that’s not quite true. Sweet words like “fudging” and “embellishment” can’t hide the fact that lying on your mortgage application is actually a form of fraud. Fraud is fraud even when it’s only a wee little bit of fraud.

Mortgage fraud is a general term used to describe a variety of criminal actions where the intent is to materially misrepresent or omit information on a mortgage loan application. Usually, this is done to obtain a loan or to obtain a larger loan or to obtain a loan at more favourable conditions than would have been obtained, had the lender (or borrower) known the truth.

Just fudging some numbers sounds a whole lot less harmful than committing mortgage fraud - but in the reduction they may be one and the same thing.

“REGULAR” MORTGAGE FRAUD

Regular mortgage fraud is committed by many borrowers and I have seen endless examples of it, over the years. Most people don’t even realise that mortgage fraud is a real crime. Many people laugh it off, as if they’ve “scored one” against the lending institution. In the end, of course, we all suffer. Any type of crime or fraud comes full circle – it comes back on society. If the fraudster disadvantages the bank, then what is the bank going to do to recover? We’re all on the hook for that!

If you look at the following list of examples of “everyday mortgage fraud”, it’s easy to see that we’ve all come near some of these facts, either directly or indirectly. The innocence of mortgage fraud is so dangerous that one can only hope that better awareness may improve the situation.

– Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower rate of interest than was warranted. This is, because lenders charge a higher interest rate for non-owner-occupied properties, which historically have higher delinquency rates. The lender ends up being over-exposed as to risk. It is considered fraud because the borrower has materially misrepresented the risk to the lender to obtain more favourable loan terms.

- Income fraud: This occurs when a borrower overstates his/her income to qualify for a mortgage or for a larger loan amount or for better mortgage conditions. This is most often seen with so-called “stated income” mortgage loans (popularly referred to as “liar loans”), where the borrower states without verification the income needed to qualify for the loan. Increasingly also seen in traditional full-documentation loans, some borrowers even forge or alter an employer-issued income statement, tax returns and/or bank account records to provide support for the inflated income. It is considered fraud because in most cases the borrower would not have qualified for the loan had the true income been disclosed.

- Employment fraud: This occurs when a borrower claims self-employment in a non-existent company or claims a higher position in a real company, to provide justification for a fraudulent representation of the borrower’s income.

- Failure to disclose liabilities: Borrowers may conceal obligations, such as mortgage loans on other properties or newly acquired or shifted credit card debt, to reduce the amount of monthly debt declared on the loan application. This kind of deception works for those that have a thorough understanding of how credit reporting works. The omission of liabilities artificially lowers the debt-to-income ratio, which is a key underwriting criterion used to determine eligibility for mortgage loans. It is considered fraud because it allows the borrower to qualify for a loan which otherwise would not have been granted, or to qualify for a bigger or more favourable loan than what would have been granted had the borrower’s true debt been disclosed.

- Fraud for profit: A complex scheme involving multiple parties, including mortgage lending professionals, in a financially motivated attempt to defraud the lender of large sums of money. Fraud for profit schemes may include a straw borrower whose credit report is used, an inflated appraisal report of the subject property, a dishonest conveyancing scheme, making disbursements from loan proceeds which are not disclosed on the settlement statement, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan. The parties involved share the ill-gotten gains and the mortgage eventually goes into default. Once the loan is closed, the organizer disappears and the “investor” is liable for paying the mortgage on a property that is not worth what is owed, leaving the “investor” financially ruined. If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth far less. In larger schemes with multiple transactions, banks may lend millions more than the properties are worth.

- Appraisal fraud: Occurs when a home’s appraised value is deliberately overstated or understated. When overstated, more money can even be obtained back by the borrower in the form of cash-back loan.  Appraisal fraud also exists where the home’s value is deliberately understated to get a lower price on a foreclosed home, or in a fraudulent attempt to induce a lender to decrease the amount owed on the mortgage in a loan modification. A dishonest appraiser may be involved in the preparation of the fraudulent appraisal, or an existing and accurate appraisal may be altered by someone with knowledge of graphic editing tools.

- Cash-Back Schemes: Occur where the true price of a property is illegally inflated to provide cash-back to transaction participants, most often the borrowers, who receive a “rebate” which is not disclosed to the lender. As a result the lender lends too much, and the buyer pockets the overage or splits it with other participants, including the seller or even the real estate agent. This scheme requires appraisal fraud to deceive the lender. “Get Rich Quick” real-estate gurus’ courses rely heavily on this mechanism for profitability.

- Identity Theft: Occurs when a person assumes the identity another and uses that identity to obtain a mortgage without the knowledge or consent of the victim. In these schemes, the thieves disappear without making payments on the mortgage. The schemes are usually not discovered until the lender tries to collect from the victim, who may incur substantial costs trying to prove the theft of his/her identity.

When you hear others brag about achieving a certain kind of act, even if it is a criminal one, you are deemed more likely to act like that yourself.

IS IT OKAY WHEN MANY PEOPLE DO IT?

Probably, you know of no person who would have engaged in ALL of the above fraud schemes. That’s good. However, since you’ve read this far, you’ve probably already signaled one or more items that somebody you know may have engaged in. They might’ve been proud of their achievement! Maybe they didn’t even know it was illegal! The problem with this kind of “white-collar” crime is that it’s perceived as being quite harmless because nobody gets hurt (immediately).

The point I’m trying to make is that mortgage fraud IS harmful, no matter where it occurs. It actually harms us all, more than we think. Because if lenders “lose” on fraud cases, it’s much like shop-lifting; that too hurts us all!

Compared to other criminal acts, how bad would mortgage fraud really be? See how easy it already is to justify certain behaviour?

IN OTHER SUNSHINE COAST NEWS

There’s so little crime on the Sunshine Coast that it’s not uncommon for people to leave their houses unlocked. Thieves have no purpose here because where are they going to take the stuff – on the ferry?

Dozens of RCMP police officers live and work on the Sunshine Coast. Virtually lacking nasty crime here, this must be a dream posting for most members.

Reading the weekly police report in the local papers is always a pleasure and may actually bring a smile to your face. Somebody went on a joy ride on an unlocked bicycle. Another person rifled through a pile of papers left in an unlocked car. Really, the most common crime on the Sunshine Coast is probably the consumption of a joint, not something that even reaches the statistics of crime. Also really just something that most people consider naughty but not indicative of a criminal mind.

After such a "heavy" topic, it might be good to read up on some more pleasant mortgage subjects, at your convenience. Links are provided below.

MORE: If you found this a worthwhile blog article, you may also enjoy these submissions:

Mortgage terminology explained: http://www.mennorealty.ca/Blog.php/big-bank-terms

The average Canadian mortgage at $151,000? http://www.menno.ca/?p=19433

The 80% rule in mortgages: http://www.mennorealty.ca/Blog.php/80-or-81percent

About deposit and down-payment: http://www.menno.ca/?p=19492

About refinance and renewal: http://www.mennorealty.ca/Blog.php/renewal-1

Lower mortgage rates close to home: http://www.mennorealty.ca/Blog.php/buy-more-lowrates