Fraud is in the air

I still remember this funny commercial by Axe:

Except for love and coronavirus (it’s 2021 after all) let’s see what else is in the air.

Just yesterday I’ve read two amazing articles.
First was about SPACs, a funny and sad at the same time. I totally recommend it to anyone interested in stock market: https://yetanothervalueblog.com/2021/04/april-fools-for-post-spac-investors-nkla-goev.html

Second one was about Home Capital Group (TSX:HCG): https://chaptertwelvecapital.com/post/who-almost-killed-home-capital-group/.
While in his post Jason(author) talks more about Marc Cohodes, short trader, who is partially responsible for HCG stock crash, I have something to say about another part of the story: real estate fraud in Canada.

Personally I like and use HCG for my rainy day funds for 3 reasons:
1. They offer business account, and not many online banks can offer it.
2. They pay relatively high interest rates on their GICs and Savings account.
3. At the end of the year they send this nice box of chocolate… actually, it’s more like reason #1. 😛

Back to fraud.
My ex-girlfriend used to be a mortgage broker and she complained about how she was tired to lie both to her clients and a bank in order to get these mortgages applications approved.
Why was that?
Imagine this situation. Couple is looking for a house, real-estate agent shows some nice variants and they’ve got all excited. But house is expensive and down payment is small (5% down payment, 20x leverage 😮 ). Will they qualify for the mortgage?
Hmmm, let’s see.
Real-estate agent wants to sell the house, because he works for commission (something like 2+%), the higher the price of the house the bigger the commission.
He calls his fellow mortgage broker and tells something like this: “whether this nice couple gets their house and you get your 1% commission or you get nothing and I will stop sending my clients to you.”
Now here starts the fun, while some clients qualify for their mortgage no problem, others not exactly.
The tricks are different depending on situation:
– some are legitimate, like using child benefits to show higher family income, and several banks accept that;
– some are not so, like opening a credit line or borrowing from friends/family to use it as a down payment;
– others are completely fraudulent, like fake T4 (from a “friend” who has a business) or fake T2125;
– and the cherry at the top is just plain money laundering, when one person is on the title, but another person is paying the mortgage.

Why fraud in Real Estate didn’t cause any big troubles so far (except for HCG)?
I think the main reason is because house prices “always go up” while interest rates keep being low.
Here are 2 possible scenarios:
– One of the clients calls my ex-girlfriend, crying, she tells her she can’t pay the mortgage anymore, she has too much debt and needs to sell the house. While it does hurt emotionally, it might be not a big problem financially. She sells her house for a higher price and pays her debts at least partially.
– Another client calls 5 years after buying a house and says: “you know what, let’s refinance, take some cash out of the house so I can pay my credit cards/credit line debt.” They do just that and everything starts all over again.
As long as prices are going up, you know…

Now, I’ve heard many times, that Canadians are using their houses like an ATM machine.
Why has no one ever talked about Canadians using kids as an ATM machine? They call it Canada Child Benefit.
I understand that having kids also means lots of expenses, but banks don’t care! At the bank, they ask about your municipal tax bill, about your electric bill, even about your condo fees, but they never ask about your “baby bill”!
For some families children are a source of guaranteed tax-free income and a way to pay their mortgage or even buy a house in the first place.

OK, some stories that I heard:
– A guy with good job, a wife (no job), a retired mother and a newborn. They need a house, but don’t have a down payment. They borrow from a friend and provide a paper to the bank, that this friend is a brother of the wife and this money is a gift. They sign another document between two of them, that money is a loan and should be repaid in 2 years.
This great idea was proposed by “mortgage specialist” who happens to be an employee of one of the Canada’s Big Six banks, where they’ve got their mortgage eventually.
– Another guy, successful businessman, but with one little problem, not always declaring his taxes correctly, needs to launder that extra cash. What to do? Buy a house and not just one!
He has several houses where he put all kinds of relatives on title, but he pays all the mortgages himself. How exactly did he do this? No idea.

I definitely do not approve this, but it’s not just those 45 mortgage brokers, caught by HCG (and only 1 broker actually lost his license).
While I hope majority of people follow the law, there are others, from top execs to actual home buyers, who commit fraud or push others to do that.
Will it cause problems in the future? Sure, but who knows when.