Mortgage fraud is on the rise and has severe implications for borrowers, homeowners, lenders and the Canadian economy. This type of fraud is carried out by individuals or groups that set out to intentionally misrepresent, omit, or hide information to buy property or secure a mortgage that they would otherwise be ineligible for. 

Mortgage fraud in Canada remains a growing concern, fuelled by the strong demand for real estate, rising interest rates, and inflated property values. Mortgage fraud carries severe penalties, such as fines, imprisonment, and loss of assets. Consumers and professionals play a role in preventing fraud and must remain vigilant in the housing and mortgage market.

Key Takeaways

• Mortgage fraud is a serious crime with severe penalties that can impact borrowers, lenders, and the Canadian economy.
• Common types of mortgage fraud include shelter, title fraud, fraud for profit, straw buyer fraud, and foreclosure fraud.
• Protect yourself from mortgage fraud by being vigilant and truthful on applications and working with reputable professionals.

What Constitutes Mortgage Fraud?

Mortgage fraud is intentionally falsifying or leaving out critical details during a mortgage application to obtain a mortgage or a larger mortgage amount than you would have been approved for if you provided accurate information. It is also considered mortgage fraud if someone uses your identity (identity fraud) to secure a loan in your name or to alter the ownership of your property. 

Those who commit mortgage fraud can vary from single borrowers to those within the industry to organized criminal networks. Their reasons often revolve around monetary gains, such as obtaining a property they would otherwise be ineligible for or profiting from artificially inflated property values. 

What Motivates Someone to Commit Mortgage Fraud?

Financial gain is a significant motivation for borrowers and industry professionals to commit mortgage fraud. For borrowers, this involves altering information to obtain a property or higher-valued property for which the borrower would otherwise qualify. In many cases, borrowers who commit mortgage fraud fabricate their income or fail to disclose their other debts to obtain a mortgage. 

For industry professionals, this typically occurs when individuals in the industry, such as lenders, mortgage brokers, real estate brokers, lawyers, appraisers, title insurers, or credit agency employees, are part of a plan to defraud borrowers for monetary gain. 

Different Types of Mortgage Fraud

There are many types of mortgage fraud in Canada. The following are common types of fraud that borrowers and lenders must be vigilant in detecting and preventing. 

Mortgage Fraud for Shelter

This first-party fraud occurs when a borrower provides false or misleading details on their mortgage application to meet the lender’s requirements. This may entail submitting incorrect or fabricated documents with an inflated income, claiming to be a full-time salaried employee when that is not the case, withholding information about outstanding debts or existing mortgages, or indicating that the property will be used as a primary residence while the intent is to rent it out and use it as an investment property. 

This fraud typically increases in challenging mortgage markets or when property prices and interest rates are high. Borrowers who commit this fraud will be held accountable for any monetary losses in case of default. They may face criminal charges, hindering their future eligibility for credit or a new mortgage. 

Title Fraud

Title fraud is becoming a widely discussed form of mortgage fraud in Canada. If you are a property owner, you could be vulnerable, especially if your mortgage has been paid off. This type of fraud involves an individual using your identity to impersonate you and produce false documents to gain legal ownership of your property. 

Once they have obtained the title, they may remortgage the property and take the funds, leaving you with an unpaid mortgage. Additionally, they may sell the property to an unaware buyer and transfer the title to the new owner.

By obtaining title insurance, homeowners can safeguard themselves against title fraud. This form of insurance offers protection if you fall victim to title fraud, providing coverage for any financial losses and offering assistance throughout the legal proceedings. Without title insurance, individuals will be solely responsible for covering all legal expenses involved in providing proof of homeownership.

If you are away for a prolonged period with an empty house, it is important to proactively arrange for a trustworthy individual to check on the property and ensure that someone else has not claimed it. Another precautionary measure is setting up Google alerts for your address to receive notifications if your house is ever put up for sale or rent during your absence.

Mortgage Fraud for Profit

This fraud occurs when an individual or group colludes with a buyer to sell a property at an artificially inflated price. The price is used to trick lenders into giving out a loan with a higher value or to deceive other potential buyers into purchasing the property at an inflated price while hiding the actual value. 

This type of fraud is not about purchasing a home. Instead, it manipulates the loan process to unlawfully obtain cash or equity from lenders or buyers. This scheme usually involves individuals with knowledge or involvement in the industry, such as real estate agents, mortgage brokers, lawyers, title insurance providers, real estate appraisers, credit agency employees, or external investors. 

One way homebuyers can protect themselves from this kind of fraud is to obtain an appraisal from a lender-approved appraiser who is not associated with the seller. This will help to accurately determine the property’s actual value, which can be used as a condition for securing financing.

Straw Buyer Fraud

This is a different form of mortgage fraud for profit in which scammers convince a third party to use their name on a mortgage application in return for money or a fee. The third party then allows the use of their credit and personal information to purchase the property, potentially without realizing they are involved in fraudulent activities.

Straw buyers may consist of individuals known to the fraudster or strangers. In most cases, the fraudster will keep the money for themselves, while the straw buyer is left to repay the mortgage once the property falls into arrears. Sometimes, the straw buyer may be part of the scam, often using fraudulent or stolen identification to pose as a genuine buyer. They then work with others in on the fraud to repeatedly buy and sell a property at artificially inflated prices to secure larger mortgages.

Foreclosure Fraud

Foreclosure fraud commonly targets homeowners who are in danger of defaulting on their mortgage or who are already undergoing the foreclosure process. Scammers may persuade you to transfer the ownership of the property to them as collateral for a loan. They often keep the loan payments you make, and since they now have the title to your home, they can sell or refinance. This can result in you losing your home and accumulating even more debt.

Mortgage Fraud for Commission

This type of insider fraud occurs when brokers or other professionals in the industry collaborate to use fraudulent documents to secure a mortgage. This practice allows them to boost their commissions by increasing the number of approved mortgages or more home sales than they would have otherwise been able to complete without falsifying information. 

Fraud for commission works similarly to fraud for shelter. Instead of the borrower falsifying information on their mortgage application, the industry professional falsifies the information to get the application approved to receive commissions. 

Syndicated Mortgage Fraud

Syndicated mortgages are a legitimate form of investment. Borrowers seek out private lenders to invest in property or development projects, pooling these funds to create a single mortgage as an alternative to obtaining a mortgage from a bank. These types of mortgages are commonly used to finance the development of commercial or residential property developments like condominiums, offices, and retail buildings. 

Each investor is listed on the land title and typically receives a greater profit than other investment opportunities. They are guaranteed to receive their initial investment when the property is sold, and its value backs the investment. 

Syndicated mortgage fraud occurs when borrowers manipulate a property’s value to embezzle investors’ funds. In some cases, the property investors believe they have invested in may not even have a mortgage or exist. Although investors may receive interest payments at first, this is usually only temporary, and they ultimately lose their initial investment and the remainder of the promised gains. 

Tips for Safeguarding Against Mortgage Fraud

To safeguard yourself, here are a few measures you can implement to help protect you against mortgage fraud:

• Be Truthful in Your Application: Always provide truthful and complete information when applying for a mortgage. 
• Consult an Independent Legal Professional: Seek advice from an impartial legal expert before signing any mortgage or property-related documents.
• Obtain a Property Assessment: Ensure that the property you intend to purchase is accurately valued and that all necessary inspections have been carried out.
• Validate Credentials: Only work with licensed and reputable lawyers, mortgage brokers, lenders, real estate agents, and appraisers. Confirm their qualifications through the website of the provincial regulatory body relevant to the property location and look for any previous disciplinary actions or complaints.
• Review Your Credit Report: Regularly check your credit report for any unauthorized inquiries or accounts which may indicate identity theft or fraud.
• Track Your Online Presence and Address: Create Google Alerts for your name and address to monitor any online information that surfaces, such as identity theft incidents or listings of your property for sale.

Legal and Regulatory

Authorities and governing bodies have established different legislations and rules to address the increasing danger of mortgage fraud. These safeguards aim to protect consumers and maintain the real estate market’s stability. While these regulatory safeguards are vital, their effectiveness relies on public awareness and proactive actions by borrowers and industry professionals.
A crucial law in Ontario is the Homeowner Protection Act 2024, implemented to combat the exploitation of vulnerable homeowners, especially older individuals. The main objective of this legislation is to prohibit predatory lending practices that involve the registration of consumer Notices of Security Interest (NOSIs) on the land registry. These deceptive schemes often involve placing liens on a property without the owner’s knowledge or consent.

Frequently Asked Questions

Final Thoughts 

Mortgage fraud is a growing problem that can severely affect individuals and the overall financial system. Knowledge about the various forms of mortgage fraud, the ability to identify warning signs, and proactive measures to safeguard oneself can reduce the chances of falling prey to fraud. 

Contact our mortgage professionals today for honest advice for your next home purchase.