Real estate dealings in Canada have been fraught with mortgage fraud as affordability challenges continue to mount, and a new survey reveals that its pervasiveness is not lost on consumers. What’s more, it seems that some Canadians aren’t necessarily against getting mixed up in mortgage fraud.
The survey -- conducted by Leger for BNN Bloomberg and RATESDOTCA -- reflects the beliefs of 1,521 Canadians over the age of 18. Of that sample, 47% believe that mortgage fraud is common, 12% believe it’s very common, and only 5% say it’s uncommon.
But here’s the kicker: in order to secure a mortgage, 17% of respondents say that artificially inflating income is acceptable and 18% say misrepresenting details of employment is acceptable.
READ: Mortgage Fraud is Alive and Well in Canada. Can the Industry Really Stamp it Out?
“The issue of mortgage fraud in Canada has been a growing problem in recent years,” writes John Shmuel, Managing Editor for RATESDOTCA in an article for Bloomberg. “The problem is no doubt being exacerbated by an extremely unaffordable housing market across the country.”
Data from multinational consumer credit reporting agency Equifax shows that Canada’s mortgage fraud rate in the second quarter of 2022 was nearly 30% higher than it was before the pandemic. Equifax also found first-party fraud -- instances in which applicants falsify bank statements, income information, or employment data -- to be the “most prevalent fraud” in mortgage applications, at 92%.
“The housing market has cooled with rising interest rates and it’s becoming more difficult to qualify for a mortgage, which may tempt some people to misrepresent their financial information,” said Carl Davies, Head of Fraud and Identity at Equifax Canada, of that data. “There was a huge increase in fraud rates in 2021 with record high mortgage applications coupled with the race to qualify for high loan amounts."
“An Expensive Mistake to Make”
Mortgage fraud can take several forms, including falsifying income, misrepresenting the nature of employment, and not disclosing other mortgages or debts, amongst others. Jerome Trail, Mortgage Broker at The Mortgage Trail, says that even if a borrower was to get away with mortgage fraud, the ramifications of doing so could be costly down the line.
Trail is aware of cases in which borrowers have misrepresented their finances, only to find themselves with debt they can’t handle. In extreme cases, this could mean damage to the property owner's credit score, or being forced to sell sooner rather than later, the state of the market notwithstanding.
“Transactional costs are significant in buying and selling. You incur the land transfer tax and legal fees on the purchase side. And then when you sell it, it’s about a 5% realtor fee. On a $600K purchase, it's going to cost you about $60K [to sell],” he says. “So it’s an expensive mistake to make.”
In addition, mortgage fraud is considered a criminal offence and can result in prosecution.
Trail adds, in cases where a borrower is inclined to misrepresent finances, the onus is on all parties involved to resolve any discrepancies.
For lenders, this means being scrupulous when verifying documentation for legitimacy and working with borrowers to help them understand the nuances and consequences of, for instance, inflating income, concealing debt, or claiming full-time employment when it’s simply not the case.
“A lot of parts of the business are educating people,” says Trail. “[Fraud] is very prevalent, and it's a real blight on our industry. It has to get cleaned up in order for us to become, I’ll call it, more legitimized. The sooner we can rid our industry of these practices, the better off we're all going to be.”
