By Pradip Rodrigues
In early January 2015, prospective investors and home buyers in Brampton received a serious warning about posters advertising “home equity loans” to those with “bad or good credit”.
Second mortgages were on offer and the problem seemed serious and widespread enough for the Financial Services Commissioner of Ontario (FSCO) to issue a warning about this practice. Not only were these lenders not authorized to be in business, they charged usurious fees and interest rates to their customers.
Nothing changed because private lenders are still posting their offers with impunity and from all accounts, the second and third mortgage business is booming.
Business as usual
No one it seems wants to rock Canada’s over-valued real estate market, even though even top brokers and real estate agents have privately admitted being apprehensive about the possibility of a real estate crash or atleast the impact of a slowdown. And yes, they also believe real estate in the GTA is over-valued by 30 percent.
But despite all these reports and fears, a steady stream of media reports designed to assuage any doubts about real estate as an investment has worked. In August the head honcho of Genworth, the leading private insurer of residential mortgages went on record to declare that mortgage fraud was in decline in Canada, thanks to tougher regulations, better training and new technology.
But then this weekend the headline How mortgage fraud is thriving in Canada’s hot housing market in the Globe and Mail made for riveting reading.
The indepth piece indicates that banks have lost millions because of mortgage fraud, this despite to so-called tougher regulations.
There are dozens of sketchy mortgage brokers from coast to coast who specialize in getting a homebuyers loans approved by falsifying documents and inflating incomes and credit ratings. Home Capital cut ties with 45 brokers because of their illegal practices.
As home investments have become the only lucrative investment game in town, a sort of a gold rush mentality seems to have gotten into homebuyers and investors.
As an unintended consequence of absurdly low interest rates, many Canadians seem to think they’ve gotten rich and think of their home or second home as their bank. This ‘money’ sitting in their homes have made them bold enough to gamble and pick up second and even third properties. Now many banks would balk at their customers buying expensive properties even while their incomes have moved up significantly. Enter the mortgage broker who will take care of those minor details. The ones who won’t have anything to do with these illegal practices are losing big time to those who are able to generate the right paperwork, for a hefty fee ofcourse.
Rising real estate prices has caused the fraud
A worryingly large number of homebuyers are finding that their dream houses are out of their reach because tighter regulations have made it harder. Real estate agents often steer such homebuyers toward their favorite mortgage broker who specializes in getting them their mortgage approved. He or she achieves this by doctoring pay stubs, creating false income statements. Some mortgage agents have their contacts on the inside who in some way or the other assist in making such mortgage loans possible.
To be fair, most homebuyers and investors don’t end up defaulting on their loans, although many struggle to barely get by after making those payments. But as long as interest rates stay low there is no danger of large scale defaulting. But eventually interest rates will rise.
Investing in real estate is the rage
Real estate agents and mortgage brokers now hold seminars for investors looking to make a killing in one of the hottest real estate markets on earth. There are any number of people who believe that what goes up doesn’t necessarily have to come down. It appears that the immutable law of gravity doesn’t hold up to scrutiny when it comes to real estate. There are any number of homeowners and investors I’ve spoken to who believe that the price of a home can only go up.
For their sake, for my sake and for Canada’s sake I hope they are right!