Canada takes action against liar loans

By Leith van Onselen

In late October, Canada’s The Globe and Mail ran an article on how mortgage fraud is thriving in Canada’s red hot housing market, mostly via the mortgage broking industry, raising risks for financial stability:

In some cases borrowers are simply trying to buy a home that is out of their reach financially. In others, the borrowers could qualify if they had a bigger down payment and paid a higher interest rate, but instead alter pay stubs and bank statements in order to qualify for the cheapest possible mortgage. Still, more involve people… who forge documents in order to save a deal that is up against a tight deadline…

Earlier this year, Home Capital Group Inc., the country’s largest alternative mortgage lender, revealed it had cut ties with 45 mortgage brokers after an anonymous letter to the company’s board of directors sparked an investigation into forged documents, such as fake employment letters and income statements. Collectively, the brokers who were fired generated nearly $1-billion worth of mortgages for the company last year…

In an online presentation on fraud and identity theft from 2012, mortgage insurer Canada Guaranty notes that “one in 10 mortgage applications will have some element of fraud.” Credit bureau Equifax says it had been able to flag nearly $1-billion worth of attempted mortgage fraud among its lender clients since 2013.

“It’s happening on such a level that the consumer is aware that this is something that can be done,” says an Ontario mortgage broker who didn’t want his name used and who once complained to federal and provincial regulators after being referred a deal that involved a family looking to buy three homes without any reportable income. “It’s happening on such a level that some bank reps, mobile mortgage reps, have said: Call a mortgage broker, they can probably find a way to make your income higher”…

Now, Canada’s regulators are taking coordinated action to ensure that the system can withstand a severe housing market downturn. Also from The Globe and Mail:

“It has come to light that institutions have been, I would say inadvertently, making mortgages to people whose income has been falsified,” said Jeremy Rudin, superintendent of financial institutions.

“One of things we’ve been doing is encouraging sound risk management. And as we set out in our guideline on mortgage underwriting, income verification – checking to make sure the borrower has the ability to carry the loan – is an important part of sound underwriting.”

His comments follow an extraordinary series of co-ordinated announcements on Friday from the federal Finance Minister, the Office of the Superintendent of Financial Institutions (OSFI) and Canada Mortgage and Housing Corp., designed to curb risks associated with red-hot housing markets in Toronto and Vancouver.

The changes will raise minimum down payments for some buyers, raise fees associated with securitized government-backed mortgages and could require lenders such as banks to hold more capital against insured loans.

While surging home prices are part of the reason for the response, fraudulent mortgage applications have also driven the need to buttress Canada’s financial system…

We know from the US housing bubble that widespread evidence of fraud and poor underwriting only came to light after the bust.

Given the sheer size of Canada’s housing bubble, which is among the biggest in the world, one wonders how many gremlins are lurking beneath Canada’s mortgage system, readying to rear their ugly heads once the inevitable downturn begins.

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Unconventional Economist
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  1. this was everyday reality in Australia until few months ago (possible even now), no to mention that 40% of loans are speculative IO loans mostly used by people trying to buy a home that is out of their reach

    large majority of all mortgages in Australia in last 10 years are subprime in their nature and none seems to give a f### about it

    • What evidence do you have for asserting that a “large majority of all mortgages in Australia in last 10 years are subprime”? Seems a bit over the top.

      • subprime group consists of high leverage high repayment (as percentage of dual income) loans, speculative IO loans, lowDoc, NoDoc, …

    • When I bought a house in 2006 I was able to do borrow 95%, capped LMI (effectively a 97% LVR) with the FHOG contributing to the deposit. That was with a regular bank and some institutions were offering 105% lends. Based on my recent inquiries it would be near impossible to do that today.

      • You think so? I don’t, about 9 moths ago PF was claiming similar, but on talking to HSBC they were willing to lend me 95% (6.6 x income) with LMI. They were also willing to lend 9.6 x income (excluding rental income) based on a 20% deposit.

    • APRA is showing the Canadian how mortgages should be regulated!! According to APRA, subprimes loans are OK because they have mortgage insurance!! APRA also see no problem with a mortgage insurance company that has a leverage ratio of over 100. The Canadians just don’t understand how regulatory capture is suppose to work.

  2. RBA/APRA should urgently do audits of a significant sample of low doc mortgages and Mortgage insurers ought be doing an audit of their loans to check income/expense and asset/liability statements of say 10% of borrowers. They could start with properties in areas where there are likley to be large losses of employment with the resource related capex cliff and the shuttering of the car/components industry and with borrowers with employmenht in those two industry segments.

    • Holy Mackerel, have a look at that list.
      This is an outrage.
      We need a royal commission pronto and all these assholes to start paying tax
      I am amazed.

    • What about Adani? What outrage?
      I’m looking through their financials.—9-june-2015-%28r%29.pdf?sfvrsn=2

      Page 9

      Revenue $260m
      Other Income $2.4m
      Depreciation ($54m)
      General Expenses ($16m)
      FX Loss ($28m)
      Op Expenses ($55m)
      Finance Costs ($85m)
      Profit Before Tax $23m
      Income Tax Expense ($3.8m)
      Profit $20m

      That’s 2015

      2014 they paid $15.99m

      By the way you don’t need a Royal Commission. You need to change the tax system and rules. Most of the companies are doing everything exactly within the law. If they’re breaking the law then the ATO takes them to Federal Court and assuming that they are indeed breaking the law, they lose and pay tax+penalties+interest+legal costs. If they’re not breaking the law, then what exactly would your Royal Commission accomplish, except wasting money?

      • Well Mate, write this in your diary, the Law is going to change.
        And like everybody else, if they dont like it they can piss off.
        Remember how India booted out BP, that will do for a precedent.

      • Mate, I totally agree with you that Transfer Pricing arrangements are something that needs to be whacked with a big stick. However I have a feeling that if this was in fact something that could be stopped or prevented without side-effects, it would have been done a long time ago. Transfer Pricing is a subject that crops up every few years and somehow it never seems to go away.
        With the other stuff, what exactly are they going to change? Are they going to get rid of interest cost deductibility? Are they going to get rid of depreciation? Are they going to get rid of carried forward tax-losses? If they do, will this only apply to corporations or will it apply to the “battlers” and their 3rd and 4th investment property? I’m not sure what law changes you are referring to, because pretty much anything beyond curbing or reducing transfer pricing, is going to be no-go zone for any government.

  3. Canada? What about the old Aussie trick for self-employed people. Even if you can’t document your income properly you just tell the bank you’re buying an investment property and everything changes. After 6 months you kick the tenant out and move in. Wallah – owner occupier mortgage at normal (non low-doc) rates.

  4. But wait…. the rating agencies with save us…

    Skippy….btw liar loans is a misnomer…. the accurate nomenclature is Control Fraud.

  5. Friedrich Nietzsche

    The gremlins aren’t really the people who have fraudulently obtained loans – its those that have obtained them legitimately, with great wages.

    Those in the Canadian primary industries, energy, mining, even services as their economy tanks.

    They are in recession are they not ?

    Same with Australia – hence the Cat C175-20 drivers now running soap stalls at the Ballina markets.