This article was originally published in Maclean’s magazine on 18 October, 2010. Partner content is not updated.Several years ago, the BANK OF MONTREAL first noticed what it described as "irregularities" in some MORTGAGES sold in Alberta.
Mortgage Fraud the Ideal Crime?
Several years ago, the BANK OF MONTREAL first noticed what it described as "irregularities" in some MORTGAGES sold in Alberta. After conducting an internal investigation, it quietly launched a lawsuit last year that alleged a massive mortgage fraud scheme involving hundreds of people, ranging from lawyers to mortgage brokers and four of the bank's own employees - even a Calgary MP. It also hired a forensic accounting firm to try to trace the funds. BMO claims it advanced a total of about $70 million in mortgage funds to the scheme's architects, with its losses estimated at $30 million.
Those who work in Canada's mortgage lending industry described the case, which only came to light earlier this year, as unusual - not because mortgage fraud is rare in Canada (police say it's not), but because of the size and sophistication of the operation, which involved as many as 14 different interconnected groups. BMO's decision to file a lawsuit (in a bid to recoup its money) is also seen as an oddity, with some suggesting that banks and other lending institutions are reluctant to talk about what is believed to be a relatively easy - and lucrative - crime to commit. "If you're a bank with 1,200 branches, they would probably say that by talking about it, they're going to educate people on how to pull off a fraud," says Gerald Soloway, the chief executive of Home Capital Group, which sells mortgages in British Columbia, Alberta, Ontario and Nova Scotia. "I happen to feel that it is a big problem. And I, for one, would like to see more resources devoted to trying to stamp it out."
But clamping down on mortgage fraud, worth hundreds of millions of dollars annually by some estimates, is easier said than done. For one thing, nobody has any idea precisely how big a problem it is in Canada because, unlike in the United States, no one keeps national statistics on it. And the scams tend to be difficult and time-consuming for police to investigate, if they get investigated at all. But the biggest obstacle may simply be the fact that, in a booming real estate market such as Canada's, it's easy to pretend the problem doesn't exist since there's far more money to be made selling mortgages than guarding against their abuse.
As white-collar crimes go, many mortgage frauds are relatively straightforward: buy a cheap home in a good neighbourhood and then, with the help of a shady lawyer, real estate agent or other industry professionals, sell it at an inflated price to a phony "straw buyer" - basically anyone who can be convinced to apply for a mortgage using fake income and credit documents in exchange for a few thousand dollars. Thinking there is nothing out of the ordinary, the institution then lends the money (often without conducting a physical appraisal) and the ringleaders pocket their profits, leaving the straw buyers on the hook. It's often only when the lender eventually forecloses on the property that it's discovered the house in question is worth a fraction of the amount claimed in the mortgage application.
Given the vast amounts of money up for grabs, the relative simplicity of the scam, and what many argue is a lack of resources to investigate suspected cases, it's no surprise that mortgage fraud has emerged as an attractive option for career criminals in recent years. "What we've seen is that, while the housing market was going up, there was a lot of money to be made - both by legitimate homebuyers, but also by organized crime," says Greg Draper, a forensic accountant in Alberta and former RCMP officer. Plus, unlike other forms of organized crime, "nobody gets shot over mortgage fraud and the Hells Angels don't typically come and burn down your house."
The alleged BMO fraud ring, which an RCMP spokesperson said is still under investigation and has yet to result in charges, is by far the largest in recent memory, but BMO spokesperson Ralph Marranca says it doesn't indicate a systemic problem at the bank, which says only a tiny fraction of its mortgage losses are due to fraud. He says the suit was launched mainly to recoup the lost money and to "send a strong message" to would-be fraudsters.
It's unclear whether they are getting the message. In August, Alberta's integrated law enforcement unit said it had laid charges in a similar but separate $12-million mortgage fraud case after a two-year investigation. The financial institutions allegedly targeted include Scotiabank, ATB Financial, First National Financial, TD Canada Trust, CIBC, Merix Financial, Royal Bank and MCAP Financial, according to police. A 31-year-old man, described as a ringleader, has been charged with 23 counts of fraud over $5,000 and one count of extortion. Other individuals are also facing charges.
While mortgage fraud is a problem across the country, Draper says Alberta emerged as a particular hot spot because of the booming housing market in cities like Calgary, where rapidly escalating prices don't look out of the ordinary. As well, he says the province's laws make it easier for buyers to assume someone else's mortgage, allowing crooks to transfer properties back and forth several times in a bid to artificially inflate the price.
Police in Mississauga, Ont., near Toronto, recently busted a mortgage fraud ring that involved a credit union catering to the local Croatian community. The suspects are accused of defrauding the credit union and its 4,000 customers of about $9 million over a six-year period, although their deposits are covered by insurance, with the exception of a $250 membership fee. The scam was similar to the ones uncovered in Calgary, but involved parcels of rural land instead of houses, police alleged.
It's not just banks and credit unions that are being victimized. People who buy in neighbourhoods where mortgage fraud is rampant are at risk of paying more than necessary for their houses and, subsequently, more in property tax. And they can suffer further when a wave of foreclosures hits, causing property prices to plummet. Those recruited as "straw buyers" have sometimes been painted as victims - particularly new immigrants without a solid grasp of how the country's real estate industry works.
The recent flood of high-profile cases has prompted calls for action. "People within the mortgage industry - lenders, insurers and others involved in real estate transaction - all want to make sure that this crime is treated seriously and that the proper resources are applied," says Jim Murphy, the president of the Canadian Association of Accredited Mortgage Professionals, which boasts some 12,000 members and represents more than 90 per cent of mortgage activity in Canada. A first step, he says, is getting a handle on the problem by creating some sort of centralized reporting database. That's now the case in the U.S., where mortgage fraud is being closely tracked and was estimated to cost various institutions some US$14 billion last year. It's such a serious problem that the FBI assembled a national mortgage fraud team in 2008 that's charged with working with law enforcement agencies and the real estate industry to investigate everything from loan origination scams, where falsified information is used to obtain mortgage loans, to shady dealings in the market for mortgage-backed securities.
While Murphy says he doubts the problem is nearly as widespread in Canada, where the banking system is different and didn't suffer from the same level of risky subprime lending, the truth is there is really no way to tell for sure. In Canada, mortgage fraud is generally dealt with by the commercial crime departments of local police agencies. The RCMP has investigators who specialize in mortgage fraud in Calgary and Vancouver, but there is no dedicated team at the national level, according to a spokesperson.
As for numbers, the industry group representing the country's banks says it doesn't keep any statistics on mortgage fraud on behalf of its members. Maura Drew-Lytle, a spokesperson for the Canadian Bankers Association, says numbers are "difficult to compile because there are a number of groups taking the losses," ranging from banks and credit unions to insurance funds. A spokesperson for the CANADA MORTGAGE AND HOUSING CORP., meanwhile, wasn't able to provide any data on how much it pays out annually in claims related to mortgage fraud before this article went to publication. The CROWN CORPORATION is charged with backstopping lenders who provide mortgages to buyers who put down payments of less than 20 per cent on their homes. In total, the CMHC paid $1.1 billion in net claims last year, up dramatically from the $372 million it paid out in 2008, although much of the increase was due to the impact of the recession on homeowners who suddenly found themselves stretched to the limit. In fact, the closest thing to an official estimate is found in a 2007 report by the Criminal Intelligence Service Canada, which cites industry estimates of mortgage fraud that "range into the hundreds of millions of dollars annually."
Why the tepid response? One possible reason is because the country's banks and other lending institutions have decided that it's an acceptable cost of doing business in a sector that boasted $940 billion worth of outstanding mortgage loans last year. "The banks are in the customer service industry," says Draper. "And if they can't get the customer what they need on a timely basis, the customer will go somewhere else." As a result, many big banks rely heavily on computer-automated underwriting and property-valuation systems to conduct mortgage transactions cheaply and quickly - a part of the business the CISC report described as a "major vulnerability."
The Canadian Bankers Association, however, disagrees. "We think that is too simplistic a view," Drew-Lytle wrote in an email. "There are fraud detection measures built into these automated systems that will raise red flags for further investigation, which might include doing an appraisal." She also denied that the industry tries to keep mortgage fraud quiet. "Real estate fraud is different than many other types of fraud and much more complex. There are many different parties involved; banks are not always aware if another party has become a victim."
Like all commercial lending, mortgages are a calculated gamble. But lenders can afford to be less careful in a hot housing market, where a property that gets foreclosed on today will likely be worth more tomorrow (giving defrauded lenders an opportunity to recoup a portion of any losses). Add to that the fact that many of the riskiest loans are likely to be insured by the CMHC, which says it has a policy of paying 100 per cent of all eligible costs on fraud claims made through its automated system (with the notable exception of cases where the lender or its staff are involved, which may be why BMO decided to pursue the case in the courts), and it's easy to see why many are willing to take the risk.
Murphy, for one, says he would like to see mortgage fraud treated as a more serious offence (most suspects are usually charged with fraud over $5,000), with more police resources dedicated to investigations. "If someone has a DVD player stolen from their home, the police come and fill out a report," he says. "We think mortgage fraud should be dealt with in the same way because they actually take the whole house."
Maclean's 18 October, 2010