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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