But as long as the music is playing, you’ve got to get up and dance
Canada or at least Vancouver and Toronto area is facing a housing affordability crisis. I have written about it many times earlier
so I will not reproduce the charts again. However, whenever discussing it with banks or regulators, their response can be summarized as:
Unlike US banks in 2008 and earlier, Canadian bank’s are well capitalised and lending standards are stronger so Canadian real estate debt is not like US pre-2008
Since they have a much better overview of the industry than myself, I took their word for it. The only kink I saw was a personal anecdote which I wrote in Unintended, or intended, that is the question but one anecdote does not a statistic make
I asked a real estate broker what will be the consequences of the new mortgage rules. His reply, “Don’t you worry about it at all. You tell me which house you want to buy, I will arrange for you to qualify under the new rules.”
As I was looking for a rental place, I didn’t probe further as how will he make me qualify. I should have satisfied my curiosity.
Then I came across tweets of @mattintoronto and he had some interesting tit bits to share
Again it is anecdotal but every time I used an Uber in Milton, driver tried to sell me a condo where he is either acting as a broker or is the owner. Same goes for driving instructors as heard from many of my friends.
But what I found scary in the above tweet was the [fake] Notice of Assessment that were being used to qualify. It reminded me of the whole LIAR loans and Countrywide saga that played a significant role in the US subprime crisis.
I presumed that what Matt was highlighting was something new but bit of googling revealed that it is pretty prevalent in Canada
This was published last year by @tamsinrm but seems no one cares
Those in the industry agree that much of what constitutes mortgage fraud in Canada is what’s known as “soft fraud” or “fraud for shelter” and usually involves people who are genuinely looking to buy a home and pay their mortgage, but can’t quite qualify for a conventional loan.
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 like Mr. Dhaliwal, who forge documents in order to save a deal that is up against a tight deadline.
Soft fraud? I didn’t know there are two types of frauds. Anyway, one shouldn’t ask the realtors or the bankers what do they think because they come up with this
Broker Mr. Cashin blames overly stringent federal rules governing insured mortgages, such as shorter amortization periods and higher mortgage insurance premiums, for making it harder for average Canadians to get a mortgage, especially in expensive markets like Toronto or Vancouver.
Such policies are aimed at ensuring the housing market didn’t experience a catastrophic U.S.-style meltdown. Mr. Cashin argues that they have had the opposite effect, pushing otherwise creditworthy borrowers who would have qualified for a conventional mortgage in the past into riskier areas of the market, including to industry professionals willing to commit fraud to get a deal done at all costs.
“They’re creating an environment for people to cheat because they want those low rates,” he says. “A lot of times it’s because they need it. House prices are going up. Everything is going up except people’s wages, but policy is keeping the cheap money away from the people who need it the most.”
Others say the driving force behind mortgage fraud is to help clients who have the means to afford the mortgage, but who work for cash or otherwise aren’t declaring all their income. That might make them tax cheats, but it doesn’t necessarily put them at higher risk of defaulting on a mortgage.
“If I feel a client can afford it, I’ll help them and guide them,” says one Toronto mortgage broker who spoke on condition of anonymity because he admits he helps clients fake job letters, income documents and employer phone references.
“Yes it’s fraud. But we are looking out for the bank. We are looking out for the economy in that we’re not giving the mortgages we know are going to screw up,” he says. “I will stop clients and deals that I know are headed for trouble because it’s not healthy for anybody.”
Home Trust CEO Gerald Soloway told an analyst conference call earlier this year that the mortgages it had flagged for fraud were actually performing better than the company-wide average.
So yeah, liar loans in Toronto are pretty common, wide spread and business as usual. The new element that was highlighted by Matt in his tweets was Borrowers getting additional loans from alternative lenders secured by secondary mortgage which the first mortgage holder doesn’t know about.
If my loan is secured by a 2nd mortgage, I would want a piece of action either in the form of higher interest rate or shorter loan term. It would be interesting to find out these things about the 2nd mortgage but if it has a higher rate or shorter term, it promotes flipping and not ownership.
Yeah…well…ok…hmm… no one cares except for a few twitterati. In the now infamous but immortal words of Chuck Prince (CEO Citibank)
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”