Mortgage fraud can take many forms. Understanding the different types will help you recognize and avoid it.
Four major types of mortgage fraud are:
- mortgage fraud for housing
- mortgage fraud for profit
- mortgage fraud for title
- mortgage foreclosure fraud
For more information, see the Mortgage fraud tipsheet.
Types of mortgage fraud
Mortgage fraud for housing
Mortgage fraud for housing is when you provide false information on a loan application to qualify for a mortgage you would not otherwise get. It also includes representing on the loan application that you are going to live in the home, when you have no intention to do so.
How it works
The goal of a mortgage fraud is to own a property or a more expensive property for which you would normally not qualify. This is done by homeowners misrepresenting income and the level of their debt so they receive a lower interest rate or qualify for a larger loan.
You have a responsibility to provide accurate and truthful information on a mortgage application. Providing false or inaccurate documents to support the mortgage application is also part of the fraud.
Mortgage fraud for profit
This type of fraud is the most complex. Mortgage fraud for profit usually involves a number of individuals working together to inflate the price of a home or get loans for non-existent homes.
How it works
This type of fraud is normally done with industry insiders, motivated by financial gain. Professionals involved in this could include a:
- real estate appraiser
- mortgage broker
- real estate broker
- credit agency employee
- title insurer
- outside investor
It may also include a seller or a "straw buyer."
A straw buyer is a person who makes the purchase on behalf of another person. If the real buyer has poor credit and cannot get financing, they would approach a straw buyer to buy for them.
The straw buyer may, for a piece of the profit, lend their identity and good credit to purchase a home. By lending your identity and credit, you become a straw buyer. The real buyer then promises to make all payments and pay the straw buyer for the use of their identity and credit rating.
These insiders may, knowingly or unknowingly, accept the use of false personal or financial information, use inaccurate appraisals, or transfer mortgage funds to an individual knowing they will be misused.
Straw buyers can be held legally responsible for the debt they take on for others. The straw buyer takes the risk if the real buyer cannot or does not pay.
One common outcome of the scam is that the professionals pocket the cash and the straw buyer is left with the property and no means of paying for an inflated mortgage on the property. A person who has had their identity stolen may unwillingly become a straw buyer.
Other mortgage fraud schemes for profit can be carried out by individuals who take money from investors and promise it will be invested in high yield mortgages.
In some cases initial promises are not followed through and the actual transaction as outlined may not even occur. If the transaction involves a scheme or arrangement where the purchaser may earn a return through the efforts of a third party in connection with real estate, it may be considered a sale of a security and would fall under the jurisdiction of the Alberta Securities Commission (ASC). Remember that any investment involves some level of risk. Usually, higher returns mean a higher level of risk.
Keep an eye out for abnormal dealings with your broker. If they are trying to pressure you into making a decision you are not comfortable with, they may be trying to scam you.
Always deal with a broker who is registered through the Real Estate Council of Alberta (RECA), and report any unusual transactions to the RECA.
Mortgage fraud for title
Mortgage fraud for title occurs when someone uses your stolen identity, fake documents and identification to change the title on your home.
How it works
The criminal uses fake documents and your stolen identity to take out a mortgage on your home. The bank lends money to the criminals under your name, leaving you in debt. Even if they did not change the title of the home they could leave you with a mortgage debt that you did not agree to.
They could also take the title to your home without your knowledge.
Check the title on your home and regularly check your credit rating to ensure that everything is in order.
If the fraud happens, you will have to prove that you did not authorize the title change and mortgage. Although you may be able to sort the fraud out, it takes time and effort to unravel identity theft. Take precautions to prevent this type of fraud.
Mortgage fraud for foreclosure
Foreclosure scams generally target vulnerable, low-income individuals whose homes are in foreclosure, or who are at risk of defaulting on their loans.
How it works
While there are many variations within foreclosure scams there are several common elements:
- a criminal approaches a legitimate owner with a debt-consolidation scheme that typically involves the owner paying upfront fees and transferring the property title (sometimes unwittingly) to the criminal
- the legitimate owner typically receives a cash payout from the fraudster to address immediate bills and remains in the home paying "rent" or "consolidated debt payments" to the criminal
- the criminal pockets all payments from the owner and ignores bills and taxes, which leads to debt-collection procedures against the owner
- the criminal may remortgage or sell the property to an accomplice, leaving the owner without the property title, homeless and in debt
If someone is trying to pressure you into a scheme using any of the above-mentioned tactics, refuse.
Signs of mortgage fraud
How to spot the characteristics of a mortgage fraud.
Consumers should be aware of the red flags that may indicate a mortgage fraud. The existence of red flags does not guarantee a fraud, but it should be cause for suspicion. If there are more than 2 or 3 red flags in a transaction they should be taken seriously.
Common red flags include:
- someone offers you money to use your name and credit information to get a mortgage
- you are encouraged to include false information on a loan application
- you are asked to leave signature lines or other important areas on a loan application blank
- the loan amount on the mortgage is significantly higher than the value of the property
- the mortgage has been refinanced several times and in each instance, the amount of the mortgage has increased
- the seller or investment adviser discourages you from seeing or inspecting the property you are offering to purchase
If you have found false or misleading information with your transactions, contact the lender and tell them about your findings. If the persons involved are industry members (such as real estate associates/brokers, mortgage associates/brokers or real estate appraisers), report the situation to RECA in writing.
If you suspect fraudulent and/or other illegal behaviour, contact your local police, RCMP and RECA.
Law enforcement officials and lenders believe that 10-15% of all mortgage applications contain false information. Lenders can and do sue individuals who participate in mortgage fraud.
Read all documents before you sign them, or have your lawyer review them.
Get an independent representative
Each party should have their own representatives in a real estate transaction and not use the seller’s representatives. Have an independent representative registered with RECA as your real estate agent and mortgage broker.
Beware of a real estate broker or mortgage broker who has a financial interest in the transaction. If the seller objects, consider it a red flag.
Check for Real Estate Council of Alberta (RECA) qualifications
Make sure you are using a licensed mortgage broker or real estate broker who is registered under the Real Estate Act and enforced by the Real Estate Council of Alberta (RECA).
Using an authorized real estate professional does not cost a purchaser anything. Usually, all commissions are paid by the seller.
If you have a financial loss due to fraud from breach of trust from the activities of a mortgage or real estate broker authorized by RECA, the assurance fund may compensate you for financial loss.
Losses from unregistered brokers are not covered.
Report suspicious transactions to RECA.
Do your research
Consult public real estate websites to review property listings in the community where the property is located. Compare features, size and locations to establish if the asking price seems reasonable. Ask your independent representative to provide you with a comparative market analysis of the property.
Get the property checked
Follow these guidelines when getting the property checked:
- in the offer to purchase, include the option to have the property appraised by a designated or accredited member of the Appraisal Institute of Canada or the Canadian National Association of Real Estate Appraisers
- ask for a copy of the land title, or go to a registry agent office and ask for a historical title search
- insist on a home inspection to guard against buying a house that has been cosmetically renovated or used as a marijuana grow-op; grow operators frequently use mortgage fraud to purchase their properties
- ask to see receipts for recent renovations
- when you make a deposit, ensure your money is being held in trust
RECA has an assurance fund to provide some financial protection for clients of licensed mortgage and real estate brokers. If you suffer financial losses because of fraud or a breach of trust from a mortgage or real estate broker authorized by RECA, the assurance fund may compensate you for your financial loss. Clients of unlicensed fraudsters are not eligible for this protection.
To learn if the person you are dealing with is an authorized individual, check with RECA before you make a deal. Call RECA at 1-888-425-2754.