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Mortgage Fraud & Organized Crime in Canada
Organized Crime’s Involvement in Mortgage Fraud
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 B.C. Criminal groups target Canadian neighbourhoods that are gentrifying from older, neglected or industrial areas into desirable places to live. Criminal groups target the extreme price discrepancies in these blended neighbourhoods between newly built or restored properties of higher value and the existing properties of lower value.
Numerous criminal groups across Canada are involved in a wide range of mortgage frauds at varying levels. The criminal capabilities of groups involved in mortgage fraud vary in terms of sophistication. Some criminal groups also have an extensive criminal history in various frauds, ranging from counterfeit currency, payment card and cheque fraud to loan and real-estate frauds. These groups may commit a limited number of mortgage frauds using relatively simple fraud schemes. Other, more sophisticated, criminal groups undertake multiple fraudulent mortgages, ranging from several dozen to a hundred per group, in a series of complex transactions. Organized crime groups continue to seek out individuals with specialized skills in the real-estate and financial sectors in order to facilitate (knowingly or unknowingly) mortgage frauds.
A number of criminal groups involved in mortgage fraud seek out vulnerable or criminally inclined individuals to use as straw buyers. Some groups recruit (or coerce) individuals who are newly arrived to the country to act as nominees on fraudulent mortgage applications. Some of these nominees are unaware that their personal information is being used to facilitate a fraud while others are afraid to raise objections. In return for the use of their name and personal financial information, the nominees sometimes live in the residence for a few months rent-free. Other, more unfortunate nominees are unknowingly left responsible for the mortgage which enters default after the mortgage funds are stolen by the criminal group.
Harms from Criminal Activities
In terms of measuring threat, “harm” refers to the adverse consequences of criminal activities. Harms can be direct and tangible, such as fraud or thefts, whose effects can be quantified in terms of monetary loss. Criminal harms also encompass a range of intangible effects more difficult to quantify. For example, the loss of quality of life is difficult to measure or to compare objectively against a merchant’s loss of business due to counterfeit goods.
Criminal harms can also broadly affect society as a whole, such as the costs of responding to and bringing offenders to justice through the criminal justice process (including law enforcement, medical care, victim services, courts, legal aid and correctional institutions).
The criminal intelligence community, through the CISC network, is working to objectively assess the harms caused by organized criminal activities. Integrating both threat and harm in threat assessments further assists senior law enforcement leaders in setting enforcement and intelligence priorities at the municipal, provincial and federal levels.
Harms from Mortgage Fraud
In terms of social harms, mortgage fraud can cause significant psychological or mental stress to the victims. The consequences to victims can include guilt and shame, disbelief, anger, depression, a sense of betrayal and a loss of trust. Individuals can also spend a considerable period of time recovering lost or stolen identification and repairing damaged credit histories.
Multiple mortgage frauds within a neighborhood can result in inflated neighbourhood property values, higher property taxes, an inability to sell homes, and abandoned properties. Individuals who unknowingly buy properties that were former marihuana grow operations or clandestine laboratories may expose themselves and their families to toxic chemicals, mould and structural problems. Negative consequences also result from the corruption or collusion of individuals working in either the public or private sectors. Mortgage fraud can damage the professional integrity and reputations of mortgage-industry professionals and their related institutions.
In terms of economic harm, the corruption of professionals in the real estate and mortgage industries is difficult, expensive and time consuming to investigate. According to the Law Society of Upper Canada in Ontario, each mortgage-fraud investigation involves, on average, reviewing and analyzing 75 property deals2. As a result, an investigation by the Law Society of one of its members for mortgage fraud requires approximately the same time and resources as investigating 20 non-mortgage fraud investigations.
The number of fraudulently obtained mortgages, and losses related to them, are difficult to calculate because fraud is often difficult to prove. In Canada, dollar losses related to mortgage fraud are estimated to be in the hundreds of millions annually. The size of loss largely depends on the value of the property at the time of foreclosure. At a meeting of the Canadian Association of Forensic Investigators in April 2007, Peter Vukanovich, President of Genworth Financial Canada, a major insurance company, said that the average mortgage fraud loss per property was approximately $100,000.
One challenge is that the healthy real-estate market has caused housing prices generally to increase. As a result, it is sometimes difficult to detect fraudulently over-valued properties. However, after a real-estate market downturn, the prices of some of these fraudulently over-valued properties will fall. As a result, defaults will occur and some frauds will be readily apparent.
Financial lenders and/or mortgage or title insurers bear most of the financial burden from mortgage fraud. Some of these losses may be passed on to all consumers in the form of increased mortgage-insurance premiums. Consumers may have to deal with higher loan rates and fees, stolen identities and possibly impaired credit ratings. Title-theft victims spend time, effort, and legal fees to recover lost title to their homes and repair damaged credit ratings.
Looking to the Future
Mortgage fraud for profit will remain a significant criminal threat as there are always ways to illicitly manipulate the age, size and value of a property and to commit fraud. Mortgage fraud will continue to occur in major urban centres across the country, as well as within newly renovated urban sub-pockets.
Criminal groups across the country will remain involved in mortgage frauds for profit, with some expanding from another fraud type such as payment card fraud. Criminal groups will continue to exploit professionals within the financial and real-estate industries who will knowingly or unknowingly assist them in their fraudulent activities. Organized crime will also continue to use mortgage fraud to further their criminal activities, such as acquiring properties for marihuana grow operations or clandestine drug laboratories.
Mortgage-fraud schemes undertaken by organized crime groups will become increasingly sophisticated. This could involve, for example, greater use of fake financial information such as credit histories, employment letters, tax returns and automatic-payroll deposits and incorporating false companies. It may also involve the use of corporate shell companies, corporate-identity theft and the use or threat of bankruptcy or foreclosure to dupe homeowners and investors.
Online sources of fraudulent documents, such as black-market websites that deal in illicit data like stolen or counterfeit financial information, will remain tools to facilitate frauds.
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 undertaking mortgage fraud will continue to exploit individuals in the financial, real-estate and mortgage industries to – knowingly or unknowingly – facilitate the frauds. These industry insiders will continue to pose a substantial threat with their access to corporate systems and/or databases, and their ability to bypass physical and electronic security measures through legitimate means.
Key Terminology
Appraisal - The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home.
Appraised value: An estimate of the value of the property. This appraisal is done for mortgage lending purposes and should reflect the market value of the property.
Appraiser: A qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate. This individual is normally a professional and member of the Appraisal Institute of Canada or equivalent association.
Broker: An individual in the business of assisting the arrangement of funding or negotiating contracts for a client but who does not loan the money himself. Brokers normally receive a commission from the lender for their services.
Credit Agency or Credit Bureau: A company that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit. The information includes payment habits, number of credit accounts, balance of accounts, and length and place of employment. The reports are made available to individuals and to creditors who profess to have a legitimate need for the information. The three credit bureaus in Canada are Equifax, TransUnion, and Experian (which acquired the Northern Credit Bureau).
Data mining: The process of electronically sorting through large amounts of data to extract useful information, important values or key relationships.
Debt Consolidation: The replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.
Deed: The legal document signed by both the purchaser and vendor that transfers ownership. The deed is registered – electronically or physically depending on the province – at the local land registry office as evidence of ownership.
Default: Failure to repay as agreed an outstanding debt.
Foreclosure: A legal procedure whereby the lender eventually obtains ownership of the property after the borrower has defaulted on payments.
Harms: In terms of organized crime, the adverse consequences of criminal activities which can be economic or social in nature with effects ranging from direct and tangible to intangible and difficult to quantify.
MLS (Multiple Listing Service): MLS is a database which allows real-estate brokers representing sellers to widely share information about properties with brokers who may represent potential buyers.
Straw Buyer: In terms of mortgage fraud, an individual who pretends to be a legitimate buyer for a property but in reality is in collusion with another criminally inclined individual to further a mortgage scam. The straw buyer often uses fake or stolen identification to prevent being traced.
Title: The document that gives evidence of an individual’s ownership of property.
Title Insurance: An insurance policy that protects against losses resulting from errors or disputes in the ownership of property such as from forged documents.
Underwriting: The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower’s creditworthiness and the quality of the property itself and then selecting the appropriate loan term and interest rate.
2 Mortgage Fraud: Report to Convocation. Law Society of Upper Canada. March 24, 2005. 
