A recent report by the Law Society of Upper Canada made headlines when it revealed that 72 of Ontario's 36,000 lawyers are currently under investigation for mortgage fraud. The report says fraud is a growing problem across the entire real estate industry, and it urges Realtors, mortgage brokers, lenders and consumers to address the issue.
"Lawyers have a role to play in the mortgage process, but it should be recognized that the lawyer is only responsible for part of the transaction," says the report.
While buying a home has become easier thanks to competition in the mortgage industry and the emergence of online mortgage shopping, it has also lead to a "depersonalization" of the process, says the Law Society report. "This includes access to lenders without the requirement of meeting anyone in person, or having an established business relationship, the electronic transfer of funds and title documents, and appraisals of properties based on abstract computer models."
Ontario is the first jurisdiction in the world to provide electronic registration of land documents, which has smoothed property transactions but also created a new opportunity for mortgage and identity fraud, says the report.
"The result is an increasingly impersonal real estate market, that generates a large volume of work, processes applications as quickly as possible, and allows for the relatively quick exchange of property and large amounts of money -- much of it done electronically. Taken together, all of these factors combine to provide a rich target for fraudsters."
The report outlines some of the most common mortgage scams. With identify fraud, the bad guys have somehow obtained a diskette that allows them to access the electronic registration system. They look up a property on the system and find out who holds title to it, as well as the details of the existing mortgage.
They then transfer the title online and pay the registration fee and land transfer tax. Now they have the title to somebody else's house, and they electronically register a discharge on the mortgage. The fraudster then goes to a lender and asks for a mortgage for only half of the home's value, which is usually approved by the lender without an appraisal of the home. The fraudster's lawyer, who doesn't know there is anything wrong with the deal, finishes the paperwork and arranges to send the new mortgage money to his client, who disappears. When the mortgage payments stop coming in, it's a nasty surprise for the homeowner, the lawyer, and the lenders.
In value fraud, the true value of a property is artificially inflated to deceive the lender. For example, a fraudster offers to buy a house for $200,000, and then his friend buys the same property for $400,000. The second purchaser applies to the bank for a high-ratio mortgage, which is 95 per cent of the purchase price, and the bank approves the loan of $380,000. Both of the transactions close the same day. The deed is registered at the higher price of $400,000, and some of the money is used to pay for the first transaction. After closing, the report says, one of the fraudsters may live in the house for awhile and continue to make mortgage payments, but eventually they skip town. The bank sells the house under power of sale, but only gets back about $200,000 and loses out on the rest of the money.
With Canada's largest banks reporting huge earnings every year, there's a temptation to think that mortgage fraud really isn't hurting anyone except a large organization that can afford to take the hit. But ultimately, any losses to mortgage fraud will eventually be passed on to consumers, in the form of higher mortgage insurance premiums.
"And of course there is the non-monetary impact of fraud," says the Law Society report. "Real estate fraud reflects negatively on everyone involved in the real estate industry. It damages the professional credibility and reputations of mortgage industry professionals, Realtors, and lawyers who do not participate in the fraud or condone fraudulent activity."
The Law Society has created a special mortgage fraud team in its investigations department. In the last two years, it allocated 15 per cent of its $10 million regulation budget to investigating mortgage and real estate fraud involving lawyers, and this year it is adding an additional $1 million to the fund.
It's calling on lenders to put more safeguards in place to fight fraud, and it says that "greater cooperation by lenders with other authorities and investigative bodies will help hold people accountable for fraudulent activities and in turn, deter future frauds."
The Law Society is also calling on the land registry system to show "increased vigilance" in tracking suspicious transactions and usage, and warns that "consideration may also be necessary to restrict access to the electronic registration system to lawyers and government officials, so as to reduce the incidence of fraud."
The report urges consumers to make sure they trust their advisors when they are involved in a real estate deal, and beware of anyone who is advising them who may have a vested interest in the transaction. It also says, consumers should get a lawyer involved in the transaction as early in the process as possible.