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David A.Yetman


Real Estate Navigator




Mortgage fraud…The Canadian Institute of Mortgage Brokers and Lenders defines mortgage fraud as:

“The material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a mortgage loan.”

The terms “misstatements, misrepresentations and omissions” are more simply defined as lies. This includes so called “white” lies. If a lender advances mortgage money based on lies told about items such as the borrower’s income, the property’s value, the intended use of the property, and so on, mortgage fraud has occurred.

When caught up in the excitement of a dream property, it may seem harmless to inflate your yearly income by a few thousand dollars, or improve upon your job title, or fail to disclose certain debts, but what you are actually doing is mortgage fraud and mortgage fraud is a crime.


Fraud for shelter

Fraud for shelter typically occurs when a buyer wants to purchase a property that is out of their price range. An alternate situation is when a home owner who is refinancing their mortgage wants to borrow more money than their property is worth or more money than their income can support. In fraud-for-shelter schemes, the person committing the fraud intends on living in the property as a law-abiding home owner. The borrowers falsify their personal, residential, or financial information to obtain a larger mortgage than their income can support. As these buyers are already financially stretched to cover a larger mortgage than they can afford, they are extremely vulnerable to any changes in their financial situation. While the fraud is not committed with criminal intent, it is still fraud and can have legal ramifications in addition to financial ruin.

Fraud at closing

In a fraud at closing scenario, a seller and a buyer agree on a cash amount that the seller will give the buyer when the property closes. For example, a property sells for $200,000. The buyer finances the purchase with a $10,000 down payment and a mortgage of $190,000. Upon closing, the seller gives the buyer $8,000 in cash from the proceeds of the house, reducing the sale price of the house to $192,000. The lender, who mortgaged the house at a sale price of $200,000, is never informed of this transaction. This is not to be confused with a cash-back incentive, which is common in real estate trading, because in a cash-back situation, the lender is informed of the cash back amount and the mortgage is financed based on the true selling price of the house, not an inflated selling price, as in the case of fraud at closing. While this may seem minor when compared to other types of mortgage fraud, the buyer is obligated by law to disclose all financial transactions to the lender. Failure to do so is a criminal offense. Industry Members that permit buyers and sellers to perform fraud at closing do so at the risk large fines and/or licence suspension or cancellation.

Getting the “low down” on down payments

You’ve seen them … the advertisements boasting “low down payment”, “$1,000 down” or “0% down”.

Buyers who can’t qualify for a home loan from a traditional lender are offered the opportunity to purchase a property for a low down payment and low monthly payments.

When buyers respond to these ads, they are often not told the price of the property, which is usually inflated. Instead, the seller asks how much money the buyer has for a down payment. If their down payment is not large enough, the seller suggests arranging for a second mortgage from a private lender to make up the shortfall.

 The private lender is usually someone connected to the seller, and the second mortgage is usually at a very high interest rate.

The buyer may be told that they will be able to assume an existing mortgage, or that the title of the property will be transferred later.

If the buyer is unable to make the payments, the property goes into foreclosure. The buyer is left homeless and still on the hook for the outstanding balance on a mortgage that is worth more than the market value of the house.

“Flipping” property—what’s it really worth?

Another face of mortgage fraud is the dishonest seller who artificially inflates the value of a property. Properties used in mortgage fraud often have little value in the marketplace. The seller inflates the value of the property using a phony appraisal and arranges for buyers who can qualify for a large mortgage.

Once the mortgage is delivered, the home is sold or “flipped” and the mortgage is assumed by another buyer. When the property is flipped, the false appraisal remains with the property through multiple transactions making it difficult to determine the property’s true worth. The end buyer, who is not part of the fraud, is conned into thinking they are purchasing a sound investment property, but when they go to sell, they find that the value of the property was over-inflated. This buyer is left to repay a high mortgage on a property whose market value is far less than the mortgage.

Before you buy, do your research. Check the listing history on the property. Has it had a lengthy history of listings? Has it been sold and resold a number of times?

Compare the general price range for the property with others listed in the same neighbourhood. And finally, if you decide to make an offer to purchase, include the option to have an independent appraisal completed by a designated or accredited member of the Appraisal Institute of Canada.

Selling your identity—AKA—“Straw Buyers”

Phony loan applicants are known in the mortgage industry as “straw buyers.” A straw buyer is usually offered a payment, often several thousand dollars, for the use of their name and credit information. As a straw buyer, the person may not know that his or her name will be used on a mortgage application. Even if the person didn’t know that their name would be used to commit mortgage fraud, ignorance is not a legitimate excuse under the law.

Another way straw buyers are used in mortgage fraud is to have you sign documents that contain false information. For example, if you state that you will be residing in the property and you have no intention to do so, you are committing fraud. If you sign a document that states you know the property is worth a specific amount, but you have never seen the property, you are committing fraud. If the lender asks if the down payment came from your own funds and you answer dishonestly, this too would be fraud.

After a straw buyer takes title to the property, the person behind the scheme usually assumes the mortgage and the title to the property. However, a straw buyer may still be responsible for a mortgage even after someone else has assumed it because it was obtained fraudulently. It is a criminal offence to obtain credit under false pretences. If payments are not made on the mortgage, the lender will foreclose on the property to recover their losses. The straw buyer could be sued for the difference between the amount of money received from the sale of the property and the amount of money owed on the mortgage. The straw buyer could also be responsible for legal fees relating to the cost of the claim, any interest owing after mortgage payments stopped, any outstanding utility bills and taxes, insurance on the property and any damage to the property.

A straw buyer who takes title to a rental property will become the landlord under the Residential Tenancies Act. The straw buyer will have all the responsibilities of a landlord including the return of the security deposit when the tenant leaves.

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Reposted from the Nova Scotia Real Estate Commission