SmartHomeOwners

CALGARY: A competitive mortgage industry, combined with hot housing markets and lax oversight, has left banks and consumers vulnerable to frauds such as those alleged in a massive Bank of Montreal lawsuit, say experts.

The bank is suing hundreds of people in an alleged $70-million mortgage fraud, one of the largest in Canadian history.

Yet the bank is hardly alone. A 2007 report by the Criminal Intelligence Service Canada suggested hundreds of millions of dollars are lost in the country each year due to mortgage fraud.

The Bank of Montreal alleges the scammers would find inexpensive houses in neighbourhoods where most houses cost much more. They would then request a mortgage in line with the cost of the other houses, and forge documents to back up their claim of its value.

They used so-called ``straw buyers'' who put their names on the mortgage applications to make the transaction seem legitimate, sometimes forging their income and assets to make them more appealing buyers. The fraudsters could then pocket the difference.

It's a familiar tale to forensic accountant Al Rosen, who said he wasn't at all surprised to hear of the latest fraud.

Rosen gives a general example of a house worth $60,000 in a community where most other homes are going for $130,000. If con artists use forged documents to get a mortgage worth $115,000, they pocket a substantial profit.

``You get the money from whoever is the lender, some mortgage company, and suppose they get back $115,000 in cash. They've paid $60,000 in cash for the thing, so they've got $55,000 that they can take and ship offshore,'' says Rosen.

Sgt. Conal Archer, a commercial crime expert with the RCMP, says straw buyers are often told they're simply taking part in a legal investment opportunity, but are left liable for the result.

``A straw buyer or a person who qualifies for a mortgage illegitimately as a result of being paid to go on title could be charged criminally for fraud and also could be held liable in a lawsuit,'' he said.

Some people sign up for one mortgage only to find out several years later their identities have been used to purchase five or 10 houses.

``It's very risky for someone to do this and many, many, many people are approached on a daily basis.''

One problem is that banks have centralized the bulk of their mortgage approvals, Archer said.

At one time, people getting mortgages would go to their local bank where everyone would recognize them. The bank would then work with an appraiser they knew to check out the property, he said.

Now, mortgages are often processed through a long line of people including mortgage brokers, real-estate agents and lawyers, and they may not take the time to do all the necessary checks.

``The market for mortgages is very, very competitive, so the faster they process mortgages, the faster they are able to make money,'' said Archer.

``Mortgage fraudsters take advantage of that issue.''

Another factor may be a hot housing market, said Archer. If houses in an area are increasing in value due to market forces, banking institutions won't be suspicious when they see a house go up in price.

There has also been a change in how banks assess properties for which they're granting mortgages.

Toronto real estate lawyer Bob Aaron said at one time banks would request a full appraisal of a house which included an expert physically checking out every nook and cranny.

While that's still sometimes done, banks much more frequently rely on other forms of appraisal. One type of electronic search provides an average for an area by averaging three houses in it, other averages are created by looking at house prices by street.

``The banks have been either deliberately or accidentally lulled into believing what the values are _ either because they're sloppy or because they've made a conscious decision to ignore values,'' he said.

Rosen also says averaging of house prices make it easy to dupe the banks.

``If you had a system that said, 'look, the properties in this area range from $55,000 to $150,00,' then you'd realize, 'gee, that's too big a spread for me to use a computer system to do it.'''

Aaron said the responsibility for avoiding future scams lies squarely with the banks who hand out the mortgages.

``How is it happening? Because banks aren't doing their due diligence. Why is it happening? There's a lot of money in it,'' he said.

``If the banks don't want this to happen again, they have to fix what's going on, they have to tighten up their underwriting, they have to be tougher on who they lend money to.''

Gordon Sick, a finance professor at the University of Calgary, says all the attention this latest fraud is attracting may have a silver lining for at least some of the people who get entangled in such scams.

``If these straw buyers were uninformed, they're just the general public, maybe this will actually be a way of getting them informed and not getting drawn in by something like this in the future.''