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- Red Flags
- Real Estate and Mortgage Fraud
Real estate and mortgage fraud are some of the most common types of deception that fraudsters use. It is important to learn some tips and tricks to prevent this type of fraud and loss.
Tips for real estate transactions
- Check the property ownership history for any irregularities being extra careful when the property is mortgage free and the discharge has only recently been registered. Fraudulent schemes involving identity theft often include the registration of a false mortgage discharge.
- When representing a vendor or mortgagor, ask them to provide you with more than just their deed. Ask for survey or plot plans, as well as tax bills and assessment notices. You may need to be extra vigilant if the client cannot provide this documentation.
- Compare the terms of the purchase and sale agreement for discrepancies in purchase price. If you cannot comply with the mortgage instructions or if there are any inconsistencies between the purchase and sale agreement and the mortgage instructions, advise your client that you will have to advise the mortgagee of these inconsistencies and seek further instructions. If the client refuses to consent to this, advise them that you will withdraw from the transaction. Consider discussing this contingency at the outset of your retainer.
- Be suspicious when asked to pay funds from your trust account to parties who are not the vendors noted in the purchase and sale agreement, or have no apparent connection to the transaction.
Mortgage Discharges or Transfers
The timely provision and registration of a discharge or transfer of a mortgage after a sale of real property is a key fraud prevention measure.
The Canadian Bankers Association has provided Guidelines for the discharge or transfer of mortgages along with key contacts at financial institutions.
Types of Mortgage Fraud
The Practice Advisors are available to assist Alberta lawyers with confidential inquiries involving mortgage fraud and lawyers’ ethical obligations.
In these types of schemes, the value of the property or income of the borrower is artificially overstated to deceive the mortgage lender. This may be done in one of several ways including:
- “Flips”, where one or more superficial transfers of title are used to rapidly increase the apparent value of a property. Fraudsters in such schemes often do one or more of the following
- use “straw” buyers (persons paid to act on behalf of the fraudster and whose name and credit is used for title transfer mortgage application purposes)
- collude with personnel at a lending institution, mortgage broker, lawyer’s office, and/or appraiser
- target or work within certain ethnic or cultural circles
- Misrepresentation of the original purchase price (e.g. through vendor cash-back provisions) or of the revenue potential of income-producing real estate (e.g. cash-outs on commercial property).
- Approaching multiple lenders simultaneously for loans on one property (i.e. “shotgunning”), representing to each lender that the property has substantial unencumbered equity. Another tactic is to approach multiple lenders simultaneously for loans to one individual (i.e. “chunking”), in excess of the debt service capability of that individual. The Law Society has seen at least one instance of this type of scheme.
In these schemes, mortgage financing is raised by “private offerings” in which investors are promised high returns on real estate properties or projects (e.g. condominiums). The returns are allegedly made possible because the managers of the scheme claim to have, in the case of:
- new projects: the ability to acquire, construct, and sell real estate developments at substantial profit
- foreclosure acquisitions: special access to acquire such properties at prices substantially below market value
In these cases, fraudsters claim to provide interim financing assistance to help a cash-strapped owner avoid foreclosure, in exchange for (undisclosed/fraudulent) excessive equity interest in their property.
In these schemes, a fraudster may acquire titles to multiple properties with no intention of paying the mortgages. The perpetrator collects revenue from the property, then files for bankruptcy to stall foreclosure and to allow the scheme to continue.
Additional Resources
- Mortgage Tips: Top 5 Ways to Avoid Falling into the Mortgage Fraud Trap
Jocelyn Frazer | March 30, 2015 - Detecting Identity Fraud
Nancy Carruthers | October 1, 2014 - Canada Mortgage and Housing Corporation (CMHC): Mortgage Fraud; and How to Protect Yourself from Mortgage Fraud