Updated: Nov 11, 2019
Every Christmas my family draws names so each person just has to buy one gift for one person. We have a large extended family so it serves a couple of purposes: we avoid personal bankruptcy and (mostly) steer clear of all that Christmas shopping stress. But it has unintended consequences too.
That one gift tends to get pretty ramped-up and important. All sorts of tricks are played to conceal who has drawn who; or to obscure what that hockey stick shaped gift wrapping is really hiding. Our family puts the ‘fun’ back in dysfunctional - the deception becomes the game. Some people love it - others don’t (Aunt Betty drew my name again? I don’t need more undershirts!).
Unfortunately, some people deceive in more serious contexts. In this post, we will shed some light on what mortgage fraud is and point out a few things to avoid if a game of deception isn’t your idea of fun. The mortgage application process is like a dark forrest - it's good to know the dangers before setting off on a hike . . . but you'll make it; read on.
What is mortgage fraud? CMHC defines mortgage fraud in simple terms: it occurs when someone deliberately misrepresents information to obtain mortgage financing that would not have been granted if the truth had been known. Here are a few examples:
Deceptive information on a mortgage application -
Most of you have obtained mortgage financing before. So you know the information that your bank or broker always asks for: income, intended use of the property (rental vs owner occupied), type of employment, where your down payment is coming from, and whether you have other debts.. If you misrepresent that information you could very well be complicit in fraud. The lender has every right to be concerned if any of that information is different than what was disclosed. If, for example, your down payment came from another loan, your ability to pay the mortgage lender is significantly impacted. A rental property tends not to be as well treated as an owner-occupied property. The bottom line: misrepresenting this important information to encourage a lender to approve your loan is mortgage fraud.
Deceptive information within purchase contract -
One of the main documents in a typical mortgage application package is the Purchase Contract. A temptation in private sales (non-MLS or non-realtor represented listings) is for the parties to deliberately (and artificially) inflate the price in an attempt to get higher financing. That would clearly be fraud. Sometimes realtors and even brokers are complicit (or negligent) and assist in the fraud. A typical scenario involves an offer for a price higher than the property is worth. The parties then agree, sometimes with the realtor’s help and with full knowledge of the broker, that the seller will give a credit to the buyer at the time of closing for some sort of ‘issue’ or in lieu of some defect getting fixed. This agreement to credit the buyer could very well be legitimate, provided the lender is made fully aware of the amendment - but sometimes the contract gets shipped off but the amendment fails to make its way to the lender. So what we then have is a a transaction that involves a reduced purchase price and a mortgage based on the original purchase price. That is likely mortgage fraud. Another possible scenario would be a contract that identifies a deposit was paid to the seller when in fact it was not.
Deceptive information about true beneficial ownership.
A common type of fraud in the last boom involved a third party qualifying for a mortgage and ‘buying’ the property on behalf of another person. This was referred to as a straw buyer - they were fake. The mortgage qualifier and the real owner (holding a beneficial interest in the property) convinced a lender to loan money to and on behalf of the real owner when they would not otherwise have done so. Investors can trip over this one without even thinking about it: we’ve discussed the concept of joint ventures before (which usually involve multiple parties in the purchase but where only one or two actually hold legal title to the property). If the person who is holding legal title to the land gets mortgage financing without disclosing the fact he or she is really holding title on behalf of someone else, that could be considered fraud as well. Many lenders are actually requiring a statutory declaration to be sworn with the acting lawyer at the time they sign up other mortgage related documents that confirms whether the borrower is holding title beneficially for a third party or not.
Investing in real estate is exciting, historically profitable, and generally considered one of the safest investment strategies - but if you have to lie or trick a lender to give you a loan to do it, it becomes something else entirely. It becomes a crime. Recently, Ali El-Sayed, a ring leader in a $9 million dollar mortgage fraud scheme involving straw buyers, inflated home values, and complicit third parties - he was convicted on 19 charges and was sentenced to nine years and 3 months in jail. This is obviously serious issue. Honesty (as your mom used to say) is always the best policy.
This is not meant to be, and should not be construed as, legal advice for your specific situation. You should contact one of our lawyers here at Richards + Company for further information and to discuss your particular facts and situation.
Darren L. Richards practices real estate and corporate/commercial law with Richards + Company in Edmonton, Alberta; he is consistently rated as one of the ‘three best real estate lawyers’ in Edmonton.