It was just a matter of time before mortgage fraud started making the headlines again and over the last month, it has resurfaced with a bang. The Bank of Montreal has recently filed a civil suit against 14 groups accusing them of mortgage fraud which has cost the bank over $30 million dollars in losses.
These particular mortgages in question all apparently involve using what is called a straw buyer scheme and is prevalent in very active Real Estate markets where the values are increasing rapidly. The process involves an initial individual purchasing a property at its market value, immediately bringing in a “straw buyer” who uses their good credit to apply for a mortgage on a new much higher amount.
I’ve talked about straw buyers before, but here is a quick recap. In return for just signing paperwork as they are often told, they receive a small lump sum payment of anywhere from a few thousand to ten thousand dollars. Quite often they are even given a story about how they are helping out another family who is unable to qualify for various reasons and they are doing a huge favor and a kind gesture by doing this, plus they pocket $5k.
What occurs in the background is the initial buyer, or group of buyers has arranged fraudulent appraisals and paperwork where they increase the value by tens of thousands of dollars. This is where the extra individuals named in the charges come from, it includes appraisers, bank employees, Real Estate agents and lawyers who were wittingly or unwillingly involved. Then when the new financing comes in using the straw buyer’s credit, they get their original money back plus a large profit.
By specifically targeting the worst properties in some of the nicer neighborhoods, some of these appraisals were over $100,000 higher than the purchase price. With fast profits like this you can see why it attracted so many people in, of course what good is the money when they don’t let you spend it in prison?
Now in rising markets, eventually the property values catch up and the properties get resold at their real values so the fraud goes undetected. What has triggered the detection here is that values have not gone up and many of the properties are worth considerably less than the mortgage amounts. This has caused many of the buyers to walk away or default on their payments and has left the losses in the banks hands. Except in the case of fraud, the banks are now going after the perpetrators.
What’s most unfortunate is that many of the individuals set up as the straw buyers in this case, were new immigrants to Canada and were duped by the ringleaders who profited from all the illegalities, yet typically disappear into the night after the sale. Sure being new to a country doesn’t excuse them from having to follow the same rules as other citizens, it just makes it that much more appalling that someone would take advantage of newcomers so blatantly just to make a profit for themselves.
If the market continues to stay fairly steady and starts to grow again over the upcoming years, many other fraudulent instances that occurred will continue to remain unnoticed and get passed along with no one the wiser. However if the market tanks or we see another big decrease in values, it will be quite likely there will be considerably more cases like this making headlines! Either way this won’t be the last of the charges we see, this will probably just start a mini cavalcade of banks trying to protect themselves.
