TYPICAL MORTGAGE FRAUD SCHEMES AND THEIR RED FLAGS
According to industry estimates, losses from mortgage fraud in Canada range into the hundreds of millions of dollars annually. Some criminal groups are each responsible for losses, primarily to financial institutions, of tens of millions of dollars. Mortgage fraud can leave victims with inflated property values, higher property taxes, an inability to sell their homes, and/or damaged credit histories.
Following the location of strong housing markets across the country, mortgage fraud occurs nationally but is more concentrated in the large urban areas in Quebec, Ontario, Alberta and British Columbia (B.C.). Numerous criminal groups across Canada are involved in a wide variety of mortgage frauds for profit or to further other criminal activities. Some undertake a limited number of relatively simple mortgage-related frauds while others commit multiple mortgage frauds involving anywhere from several dozen to over one hundred properties.
Mortgage fraud schemes undertaken by organized crime groups are increasingly sophisticated through the use of technology, for example, involving online sources of fraudulent documents, such as black-market websites, to obtain stolen or counterfeit financial information. Financial institutions’ heavy reliance on computer-automated underwriting and property-valuation systems to conduct mortgage transactions, coupled with the difficulty of verifying the borrower’s income or identity, will continue to be a major vulnerability contributing to mortgage fraud.
Criminal groups across the country will remain involved in mortgage frauds for profit, as there are always ways to illicitly manipulate the age, size and value of a property. Organized crime will continue to exploit professionals within the financial and real-estate industries who will knowingly or unknowingly assist them in their fraudulent activities.
Actually, the story of mortgage fraud gained prominence nearly a decade ago in Vancouver with an interesting twist due to an apparently Indian connection. In January 2006, the Law Society of British Columbia had approved $32,500,000.00 in payments to cover consumer claims in a real estate fraud case involving former Vancouver lawyer Martin Wirick. It was in May 2002, the mortgage fraud came to be known to the public. Wirick was a lawyer working on behalf of a Vancouver real estate developer Tarsem Gill on the sale of numerous properties. Wirick admitted that he had misappropriated trust funds in real estate transactions by failing to pay out and discharge mortgages, and had instead applied the funds to other purposes, which were clearly in breach of the law. Wirick’s clients and other affected parties were given immediate protection by the Law Society, who conducted an audit and investigation, sought the appointment of a custodian for Wirick’s legal practice, and ensured that the claims of innocent homeowners were given priority consideration. In January 2006, the Law Society announced that its Special Compensation Fund Committee had completed its review of 555 innocent homeowners’ claims resulting in $32,500,000.00 in payments to cover Wirick’s fraudulent activities.
Definition of mortgage fraud and factors contributing thereto
A deliberate use of false statements, misrepresentations or omissions to fund, purchase or secure a loan, is the purpose as well as definition of mortgage fraud. In other words, mortgage fraud is a plan hatched to obtain money (by mortgaging fictitious properties) under false pretences, such as using fraudulent or stolen identification or falsifying income statements.
The factors behind the focus and scale of mortgage fraud are economical, political and social, namely the strong competition between financial lending institutions during a period of economic boom and the subsequent widespread pressure for rapid mortgage approvals as individuals seek the best mortgage rates. In this pressure cooker atmosphere, it is difficult for financial institutions to ensure that all the information about the purchaser, vendor and property is accurate, a practice known in lending parlance as due diligence or “know your customer/client”. There is also the fear of losing commissions and fees if the concerned financial professionals are too persnickety in approving mortgages. Above everything, according to a strategic intelligence brief, is the shadowy presence of organized crime, drug dealers, methamphetamine makers and such other assorted beauties. To people of this group, mortgage fraud is another means to facilitate other criminal activities such as: marijuana grow operations; clandestine drug laboratories; and, money laundering.
Money laundering is the least sophisticated but most commonly used method of criminal groups to launder their proceeds of crime through fraudulent real-estate transactions. Thus, in a scheme known as “value tampering,” a criminal seeks a property owner of criminal bent of mind to sell the property on paper for a price below its actual value and then quietly accept the difference in cash. The financial transaction gives false details of the deal (i.e. purchase price, source of income, employment), a concocted mix of false particulars and imagined facts, and this would constitute fraud. Thereafter, the criminal can sell the property for its actual value in a transaction following the provisions of law so as to change his illicit funds to money of the just.
That in a nutshell is the story of the creepy crawlies seen when the rock of mortgage is pried up by legal and police forces. Again there may be some rhetorics, but it leaves no doubt on the seriousness of the problem.
So, what next? Keeping in mind the maxim, prevention is better than cure, the gullible (mostly) public has to watch for the signposts leading to disaster because the criminal usually profits leaving the duped much poorer.
What is likely done with the Mortgage spoils?
- After the closing of the transaction, there is a surplus of mortgage proceeds to be paid to the borrower or to a third party;
- In most instances, part of the mortgage proceeds are sent to third parties (e.g., off-shore recipients, currency exchange);
- The lawyer is told that it is unnecessary to prepare written directions authorizing the payment of funds to third parties;
- It is always a cash-back mortgage and the cash-back is the full amount of the equity in the property; and/or
- The lawyer is to rebate a portion of the mortgage surplus to the vendor.
Who and how do the likely Facilitators participate?
- A new client (facilitator) refers a number of real estate files to the lawyer and although not a party to the transaction controls the transaction (e.g., gives instructions to the lawyer, arranges for the parties to the transaction to sign documents etc.) and directs the parties in the transaction;
- The facilitator (client) is without a personal cheque for the client’s pre-authorized debit plan but provides a blank “counter cheque”; and
- The lawyer is instructed to pay the excess mortgage proceeds to the facilitator even when he does not appear to have an interest in the transaction.
Transaction by flipping a coin: The vendor acquires the property on the same day just before it is being sold for a higher purchase price (flip transaction). The lawyer is then asked to act for both the purchaser and the vendor, that is, the master of ceremonies, in the flip transaction. The money comes from a bank on the strength of the consideration contained in the flip agreement. The Land Transfer Tax affidavit shows the higher consideration. The Transfer/Deed of Land signed by the original vendor showing a lower consideration is hastily and manually altered prior to closing to match the consideration set out in the Land Transfer Tax affidavit (i.e. the higher price).
Multiple Swindles: A new client refers a number of real estate files to the lawyer and the same parties (purchasers and vendors) who are involved over and over in transactions. It was stated that he or she is in the business of renovating homes. Like a counterfeit coin, the same real estate agency appears regularly on the agreements of purchase and sale. These transactions contain usually high ratio mortgages with mortgage insurance. Finally, the excess mortgage proceeds are used for the purchase of another property.
Remember that every fraud scheme starts with a puppet and his or her real estate property, identity and/or credit worthiness. Before you get duped into a transaction that sounds almost too good to be true, contact the expert real estate lawyers at Levy Zavet PC.