Mortgage Brokers are a better choice for consumers – a closer look!
Happy to own a home
Generally speaking, the mortgage contracts of the big five can include clauses that can reach into the consumer’s pockets deeper and sometimes without their knowledge.
A Bank of Canada report in February of this year suggested that loyal bank customers pay more. Below are some key points that consumers ought to take into considerations when evaluating the benefits of using a mortgage broker. As a consumer, you can start devoting several hours per week to stay ahead of the game and be in the loop to avoid these kinds of practices, or you can use an experienced, knowledgeable and reliable mortgage broker who will ensure that you can avoid all of these pitfalls, usually at NO COST to you. There is no question that for some individuals, dealing with a financial institution where they may already have an established relationship is the simplest and easiest option, albeit not the cheapest according to Bank of Canada’s survey mentioned above. There is also no questions that an experienced and dedicated mortgage broker can provided you superior service and quiet often save you substantial money – not necessarily in the initial interest rates only, rather by helping you avoid the pitfalls mentioned above.
Common Types of Real Estate Fraud Canadians Should Be Aware Of
Protect Yourself from Mortgage Fraud
In a market that’s gone flat, real estate fraud has increased in Canada significantly. Here are the most common types of real estate fraud to watch out for in Canada.
The most common type of fraud seen in Canada according to Global Calgary is phoney loan applications. This type of fraud occurs when one person uses their name and credit information to secure a loan when another person is going to make payments on the loan.
It doesn’t matter whether the person making the application receives compensation for doing so or not. It is fraud, and it is an indictable offence under Canadian law. The perpetrator of this type of fraud may be indicted for:
- Fraudulent concealment which is punishable with up to two years of imprisonment.
- False pretenses which is punishable with up to ten years of imprisonment.
Another type of real estate fraud which has appeared across North America is property flipping fraud. In May 2010, the biggest fraud case ever prosecuted in Canada came to light. BMO Bank ended up suing hundreds individuals, including employees, realtors, lawyers, mortgage brokers and even an MP.
The fraud involved finding recent immigrants who were willing to let their names be used to purchase properties in neighborhoods where many of the homes had high property values. These “straw buyers” exchanged their names for compensation of up to $8,000. The ringleaders of the mortgage scheme then forged paperwork with false work histories to secure mortgages in the names of the straw buyers.
The ringleaders of the mortgage scheme bought cheaper homes in the target neighborhoods at real market value. Then through a process of phoney appraisals, the ringleaders used the false documentation to convince the bank to lend money in the name of the straw buyer. Because of the inflated values, these mortgages were for far more than each individual property was worth
When the ringleaders walked away, they left the straw buyers owing on the mortgages at the inflated prices, with most buyers having no means to pay. The bank was forced into multiple foreclosures on properties that were worth far less than the balance on the mortgage.
Another type of real estate fraud that is more common in Canada according to Global Calgary is the offer of making a low down payment or assumable mortgage aimed at people who can’t qualify on their own.
A mortgage that allows a low down-payment should require CMHC insurance. If it doesn’t, there is reason to suspect fraud could be involved. And it is important to ensure that the mortgage is truly assumable. Most lenders require the borrower who assumes the mortgage to qualify.
There are other types of fraud to look out for. For example, Michael Hurd of Salt Lake City was indicted for cheating Modesto, Calif. home buyers through a program he called “The Gift Program.”
He made it appear that he was assisting those who purchased properties from him with their down payments as a gift. In reality he was transferring the money from the lender to the borrower and concealing that he was doing so. The borrower was in reality borrowing the down payment from the lender and financing the whole transaction. He was also involved in a flipping scheme that defrauded lenders of almost $2 million in West Virginia.
Summary
If someone offers money in exchange for using your name to secure a mortgage, turn the offer down. It can lead to total destruction of your credit and other financial woes.
Make sure that the home you are considering is really comparable to the homes around it. There will be visual clues. You can also compare the size of the home with those of higher values around it.
Don’t fall for offers of low down payments, etc. that appear to “help” you out. Sellers need to make profits, so be wary if an offer seems too good to be true.
Mortgage Modification – Beware of Fraud
Protect Yourself from Mortgage Fraud
Unlike the United States where loan modifications have become a government supported process, mortgage modification has yet to take off in Canada. If you hear of a programme promising to help you modify your existing mortgage, beware. It could be fraud.
Two former San Jose, California residents fled to Canada after investigators began questioning their mortgage modification operation. Reports suggest that the couple set up a similar operation in Toronto before they were caught by customs attempting to receive items that would have created new false identities for the couple. Extradition agreements with the U.S. shut the couple’s illegal operations down, and returned them to San Jose where they were convicted on June 24, 2011 of foreclosure consultant fraud.
Their scheme revolved around offering to help homeowners facing default and foreclosure work with their lender to modify their mortgage. They charged anywhere from $3,000 to $4,000 per victim. The couple posed as a “Legal Support Services” legal firm that specialized in loan modifications.
Canadians should be aware that loan modification isn’t a common practice in Canada because the mortgage structure is quite different from that used in the states. These differences are significant.
U.S. mortgages have an amortization and term that coincides. If the amortization is 30 years, the term is 30 years. In contrast, Canadian mortgages have terms which are anywhere from six months to 10 years in duration. The average term is 5 years. This means that most borrowers will look at “modifying” or refinancing multiple times over the amortization of their mortgage. It is far less frequent for a Canadian lender to need to even consider modifying a mortgage because lenders expect the borrower to negotiate at the time the term comes up for renewal.
If financial circumstances make seeking modification of your mortgage necessary, there are resources that don’t cost anything to turn to. For example, a mortgage broker can give you information on what is happening in the current market. This is information you may be able to leverage in your favor.
For example, if your current interest rate is 7% and market rates are currently 5%, you may be able to work out a deal. If lowering your interest rate to 5% would make your payments affordable and reduce the risk of the lender having to face foreclosing on your home, the lender may be willing to modify the loan for the balance of the term.
Writing up your own mortgage modification proposal protects you from fraud to some extent, yet you will still need to work with a real estate attorney to ensure that the modifications are legally binding. If you do want professional help, a mortgage broker is one of the best professionals to approach. The knowledge a mortgage broker has in the real estate market can be invaluable.
Warning Signs of Assumable Mortgage Fraud
Canadian Assumable Mortgages
Assumable mortgages can appear to be a fantastic deal, when in reality they are an opportunity for fraud. Knowing how to protect yourself from a fraudulent mortgage assumption is important.
Even financial institutions have become victims of assumable mortgage fraud. In December 2005, six Edmonton residents were implicated in a 30 million dollar case. This was just one in 27 hundred cases within that province.
The fraud may occur at several junctures. For example, first time home buyer Brandy Peacock found herself facing two demand letters when the person who she assumed the loan from, didn’t record her name with the trust company that held the mortgage.
Instead, the person she assumed the loan from went on to use the equity in the home to secure at least two additional mortgages on the property. Each month when she paid her mortgage, her payments were going to four different lenders. Until she received the demand for payment, she didn’t even realize this was happening.
She almost lost her home. Fortunately, she was able to pay the demand notes out in full and was able to avoid foreclosure when she turned to a mortgage broker who connected her with refinancing.
Arrangements Where the Lender Doesn’t Know About the Assumption
If the person you are assuming the loan from doesn’t want the lender to know about it, don’t assume the mortgage. Because most lenders require notification of the sale or transfer of a property, this is clearly fraud. You could find yourself facing a lender who demands the balance left on the note. This is because most mortgages include a “due-on-sale” clause.
The law recognizes that transfer of a piece of property as a “sale,” so with the only exception to enforcement of “due-on-sale” clauses being found in Alberta, Canada, don’t take the risk if you live elsewhere. Federal law in the U.S. recognizes the enforceability of due-on-sale clauses and so do the Supreme Courts in the remaining provinces and territories in Canada.
Even if lenders are turning a blind eye to mortgage assumptions in general, it remains risky to ignore the due-on-sale clause. Mortgages notes are often sold, and the new owner of the note may decide to call the loan when he/she becomes aware of the arrangement.
Rent to Own or Lease Option to Buy
While not all rent-to-own or lease-to-buy options involve fraud, if the seller tells you that doing a lease option instead of a sale won’t trigger the lender’s due-on-sale clause, you need to check with a real estate attorney first. In some jurisdictions, any lease that extends past three years may trigger the due-on-sale clause. Other jurisdictions recognize any inclusion of an option to purchase as justification for demanding the balance on the loan.
The Reason Due-on-Sale Clauses Exist
Canadian Assumable Mortgages
In at least one Canadian province, all mortgages have been considered assumable. In Alberta, the common “due on sale” clause was considered void until a recent Supreme Court of Canada ruling that restraints against alienation must be harmonized with laws protecting contracts. In general, the remaining provinces and territories require a seller to get consent from the bank before arranging for the sale and assumption of the mortgage on a property.
Reasoning Behind Due-on-sale Clauses
The primary reason lenders include due-on-sale clauses is to protect their investment. A lender needs to know that a mortgage is going to be paid and approximately when it will be paid off.
In the last several years, lenders have caught on to a disturbing practice that involves outright fraud. A qualified borrower approaches a lender for a mortgage. The borrower obtains approval and the purchase of the property is concluded. Then the borrower arranges for the party who really wanted to make the purchase to assume the mortgage.
The Due-on-sale clause protects the lender from someone who doesn’t have adequate income or poor credit from forcing the lender into foreclosure and all of its costs. When you do find a mortgage that is assumable, it will almost always require that the person assuming the mortgage is able to pass through the lender’s credit approval process.
Lender Reticence
Lenders may be reticent to issue assumable mortgages because they can lead to negative spread between the cost of funds and interest income when interest rates are climbing. Lenders don’t want to hold on to mortgages with low returns. If a borrower is able to transfer ownership to a qualifying buyer, then the lender has lost an opportunity to increase the income production of his/her investment.
Lenders tend to be more amenable to open mortgages when interest rates are falling, as the assumed mortgage may have a higher rate of return than the lender will earn on a new mortgage.
Legal Considerations in Canadian Real Estate Transactions
The Supreme Court if Canada has ruled that there are three situations in which due-on-sale clauses do not apply. When two Canadians own a property jointly and one dies, the survivor takes full ownership of the property. The lender cannot demand settlement of the mortgage. This is known as joint tenancy. Tenants by entirety is similar, except that it applies only to married couples.
The third situation involves bequeath of a property to a relative through a will, trust or intestacy. In this case, the mortgage continues as long as the person inheriting the property assumes the mortgage payments.
In all other situations, the mortgage must stipulate that the mortgage is assumable (with the current exception of Alberta) and under what circumstances.
