Some easy tips on how to protect yourself from mortgage fraud

  
Getting back into the swing of things, I thought I might make this post about mortgage fraud. It is becoming an increasingly prevalent problem, and it’s becoming increasingly difficult to detect and deal with.

There are actually two main types of fraud we need to be wary of when we talk about real estate.  Mortgage Fraud and Title Fraud.

Mortgage Fraud

By far the most common type of mortgage fraud involves someone obtaining a property, then increasing its value through a series of sales and resales involving the fraudster and someone working in cooperation with them. A mortgage is then secured for the property based on the inflated price.

Following are some red flags for mortgage fraud:

·         Someone offers you money to use your name and credit information to obtain a mortgage

·         You are encouraged to include false information on a mortgage application

·         You are asked to leave signature lines or other important areas of your mortgage application blank

·         The seller or investment advisor discourages you from seeing or inspecting the property you will be purchasing

·         The seller or developer rebates you money on closing, and you don’t disclose this to your lending institution

Another type of mortgage fraud is the “straw” or “dummy” homebuyer scheme. In this scheme, someone who does not have a good credit rating; or is self-employed and cannot get a mortgage; or doesn’t have a sufficient down payment, cannot purchase a home. S/he or an associate approaches someone else with solid credit. This person is offered a sum of money (as much as $10,000) to go through the motions of buying a property on the other person’s behalf – acting as a straw buyer. The person with good credit lends their name and credit rating to the person who cannot be approved for a mortgage for his or her purchase of a home.

Other types of criminal activity often dovetail with mortgage or title fraud. For example, people who run “grow ops” or meth labs may use these forms of fraud to “purchase” their properties.

Fortunately (for you, at least), mortgage fraud typically hurts the lender the most.

Canadian precedents have been set in which banks are held responsible for mortgage fraud. The BC Court of Appeals recently ruled that “the lender – not the rightful property owner – is the one out of luck in a fraudulent mortgage scheme” and that lenders “must ensure their mortgages are valid by taking steps to ensure that the registered owner obtained title to the property legally.” The same conclusion was made by the Ontario Courts a couple of years ago.

Banks, as you can imagine, aren’t too thrilled about this trend.

Title Fraud
Title Fraud is actually more akin to identity theft than mortgage fraud.  As the homeowner, you have not been approached, you have not been offered anything, and in fact most of the time you have no idea anything has happened until it is too late. In contrast to Mortgage fraud, it is unfortunately the homeowner – not the lender – who is hurt the most.

Here’s what typically happens with title fraud: A criminal, using false identification to pose as you, registers forged documents transferring your property to another name, then registers a forced discharge of your existing mortgage and gets a new mortgage against your property. Then the fraudster either makes off with the new home loan money without making mortgage payments, or turns around and sells the property without you knowing it. Whether you are the homeowner whose house was essentially stolen, the person whose name was used to secure a mortgage on which no payments are being made, or the person who inadvertently buys a house from a person who does not legally hold the deed, you stand to lose hundreds of thousands of dollars.

Title fraud is difficult to detect while it is happening, but following are ways you can protect yourself:

·         If you find your mortgage payments have stopped coming out, contact your lender immediately

·         If you would like to give someone the right to deal with your assets, consult with your lawyer first, and make sure you can cancel if need be.

·         Consult your provincial land registry office to ensure the title is in your name

·         Check your credit report on a regular basis to make sure information is accurate.  You can get a free report by mail here, or pay to get the results right away here

·         Keep your ID safe

·         Shred documents with personal information on it

·         Only share personal information with companies you trust

For more tips and information on identity theft, please visit the Financial Consumer Agency of Canada. They have a lot of great information that goes beyond this blog post.

When I first started working at the bank, I was told the number one thing to remember is to trust my gut. If something doesn’t seem right, there is a good chance it isn’t. The same is true when it comes to your mortgage. Always deal with people and companies you trust, and don’t be afraid to get a second opinion.

One step forward, two steps back: 7 Simple tips to break the pattern and pay off debt

It seems like every week that goes by, I’m again reminded by the media that Canadian household debt is at an all- time high.  Although we’ve seen a fairly large reduction of debt -- about 2% -- this past quarter, the average Canadian debt load is still up 3% from last year. What we are now seeing is largely the effect of a push to give everyone free credit in the latter part of the last decade. One of the big reasons I left the bank in 2008 was that my bonus as a financial planner was directly correlated to the number of visas I sold; I did not want to be part of a machine that promoted people getting deeper into debt.This week, I’ve decided to put together some tips I’ve come across over the years to help people control their debt levels and pay them down.

Create a budget. First and foremost, if you are going to make a reasonable attempt to pay down your debt, spend some time making a reasonable budget.  Be realistic.  If you like going to McDonalds three times a day, include that.  If it’s important to you that you drink a case of Scotch a week, include it. The point of this is to create a baseline. After determining what you are spending, figure out how much money you are bringing in. Then it’s time to get creative. You should be able to see what you are spending money on that’s important to you and what what you are spending money on that isn’t. Then you’ll have some choices to make: either make more money, or fix some spending issues.

Freeze your credit cards. By far the best way to reduce your credit card spending (and I have done this myself) is to freeze your credit card. Literally. Take an old coffee can, fill it with water, and put your credit card in. Then, move it to the freezer.  If you feel the impulse to buy something, pull the coffee can out of the freezer and let it defrost.  By the time it’s done thawing out, 9/10 times the impulse is gone. Awesome trick.

Refinance. When you have a ton of high interest debt, and there is equity available in your home, you would have to be crazy not to use this equity to pay down the credit cards.   For example:You have a credit card with a $6500 balance on it.  The interest rate is 12% and the minimum payment is $130.  Because a large portion of that $130 is interest, you are only paying down your card by $65 a month.  As time goes by, and as you continue to make your minimum payments, your payments decrease – assuming you haven’t made any new purchases. When you hit a balance of $3000, your new minimum payment would be about $60, of which only $30 would be going to pay down the balance.  At this rate, the card will be paid off in about 27 years.Refinancing, on the other hand, will add the $6500 to your mortgage.  A $6500 mortgage at 3.39% for a 25 year term will cost you an additional $32 per month on your mortgage. Bump up the mortgage payment by the $130 per month you’re already paying anyway (ask me how) and it will be paid off in 4 years, not 27. Plus you’ll have paid a lot less in interest.

Switch away from revolving credit. The banks that grant you revolving credit such as lines of credit and credit cards fully understand that there is a very good chance you will be carrying a balance. The average Canadian’s debt right now is approximately $26000, mostly in revolving credit.  As there is a very good chance that, as an individual, you will maintain a balance for many years, the banks have no problem offering you a low interest rate. In fact, many banks will offer incentives for their sales officers to sell the lines of credit over conventional loans.  If you convert to a loan, the interest will definitely be at a higher rate.  But, there is a far better chance that it will be paid off when you plan it to be. 

Consider using your savings to pay off your debt. Many people have savings as well as debt.  If you are paying 12-18% on your credit cards, and have a high yield mutual fund that is paying you 9.5% per year, you are still losing money.   If you use your savings to pay down or pay off your credit cards, wouldn’t that be like getting a 12-18% return on your mutual funds?  It would also make it far easier to add money to your savings.Focus the majority of your attention on the debts with the highest interest first. Continue to make payments on the others, but understand that the sooner you get that 28% store card paid down, the more you can put down on other debts in the future. 

Change your buying habits. Shop on Craigslist or Kijiji more often. It will be less expensive, and 99% of the time it’s a cash only deal -- no extra debt build up.

Change your credit card type. If you have a Gold Card on which you are charged $120 per year, and the interest is about 18%, but you get Airmiles or other incentives, look at your balance. This card is fantastic if you pay it off every month. However, if you carry a balance like 80% of the population does, this card becomes fantastic for the lender -- change the card as soon as possible.  It’s just a matter of calling the call center and telling them you want to change to a low interest, no fee card.  You will never be able to collect enough points to justify carrying a large balance.Getting your debt under control is simple, but not necessarily easy. It takes time to change old financial habits and create new ones, but – as with all challenging tasks – is well worth the reward. And it all begins with the budget, which is something I can help you with; it’s part of what a mortgage agent does. It’s never a bad thing to have an impartial, outside perspective as it increases the chances of having a realistic budget – and therefore increases the chances of your making real progress on paying down that debt!

Mortgages 101: Twelve questions to ask when looking for a mortgage

 

 

Getting a mortgage can be intimidating and confusing, not only for first-time homebuyers, but also for people who have been through the process before. After all, your home will probably be one of the biggest purchases you will ever make, and mortgages are, accordingly, complex products. Although getting a low interest rate is one consideration -- and often the first one people think of -- it should not be the only or even the most important factor. I've therefore compiled what I feel are some of the most important questions to ask once you've begun to think about getting a mortgage.

 

1. Should I buy?!?

First of all, renting is not a bad word!  We've all hear the spiel about how when you own, you are building your own equity whereas when you rent, you are building someone else’s. While this is true, renting has some amazing benefits that you just don’t get when you buy. (For instance, if the furnace dies in the middle of the winter, you're not the one who has to pay to fix it!)  I rented for years while I was living in Vancouver, not because the housing market was too expensive, but because when a market is as uncertain as it is now, buying may be building equity -- or it may be trapping you into owning a depreciating asset. Therefore, if you plan to own for a short period only, it may not be right for you.  I always try to ensure that clients are buying for the long term, and that owning a home makes financial sense for their circumstances.  In selling investments, the regulatory bodies demand a “know-your-customer” process, which ensures you are matched up with the right investments. Why should buying a home be different?

 

2. How do I ensure my credit score enables me to qualify for the best possible rate?

There are several things you can do to ensure your credit remains in good standing, or even to improve it. For instance:

a) Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they’re below 70% of your limits. Credit cards seem to have a more significant impact on credit scores than car loans and lines of credit.

b) Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there’s a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you may have paid the balance off the next month.

c) Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your file. The best bet is to pay your balances down or off before your statement periods close, if possible.

 d) Keep (and use) old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the cards for a long time. Use these cards periodically and then pay them off.

e) Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not immediately amend it, you can help preserve your score by making the credit bureau aware of the situation while disputing the charge with the company.

 

3. What mortgage term is best for me?

The mortgage term refers to the period of time for which the agreed-upon mortgage terms and conditions will be valid. Selecting the mortgage term that’s right for you can be a challenging proposition for even the savviest of homebuyers, as terms typically range from six months up to 10 years.  Longer terms usually mean a higher rate.  There are so many factors that go into this decision that are heavily dependent on personal circumstance and the state of the economy, that simply going for the lowest rate is never the best solution. Your best bet is to have a candid discussion about your individual circumstances with your mortgage broker, who can then make a recommendation tailored to your situation.

 

4. What amortization period will work best for me?

The amortization period refers to the scheduled amount of time it will take you to fully pay off your mortgage. While the lending industry’s benchmark amortization period is 25 years and this is the standard that is used by lenders when discussing mortgage offers, shorter or longer timeframes are available – to a maximum of 30 years. A shorter amortization means higher payments, but less interest paid over the long term; a longer amortization means lower payments, but more interest charged over the long term.  One thing to keep in mind is that it may be difficult -- even impossible, depending on the lender -- to increase the amortization of a mortgage. (You can, however, always decrease the length of the amortization.) Another thing to consider is that, by choosing a longer amortization period and taking advantage of prepayment privileges, you can retain greater financial flexibility while still achieving the benefits of a shorter amortization.

 

5. How can I maximize my mortgage payments and own my home sooner?

There are many ways to pay down your mortgage sooner that could save you thousands of dollars in interest payments over the term of your mortgage. Most mortgage products include prepayment privileges, whereby you are permitted to increase your payments by 15-20%, double your payments, or make a lump sum payment of up to 20% of the original borrowed amount once per year.  This increase in your payment goes directly to paying down the principal on the mortgage. The catch is that most lenders will only allow you to choose one option; only  a select few will allow you to use all three.  

 

6. Will I be penalized for making lump-sum or other prepayments on my mortgage?

Most lenders allow lump-sum payments and increased mortgage payments to a maximum amount per year, without penalty. But, since each lender and product is different, it’s important to check stipulations on prepayments prior to signing your mortgage papers. “No frills” mortgage products offering the lowest rates often do not allow for prepayments. 

 

7. If I want to move before my mortgage term is up, what are my options?

The answer to this question often depends on your specific lender and what type of mortgage you have. Some types of mortgages allow you to transfer your existing mortgage to a new property, as long as there isn't too much of a delay between the time you sell your home and the purchase of the new one; this is known as "portability." While fixed rate mortgages are often portable, variable rate mortgages are usually not.

 

8. Is my mortgage portable?

Fixed-rate mortgage products usually have a portability option. Lenders often use a “blended” system where your mortgage rate stays the same on the mortgage amount ported over to the new property, while any amount over the previous mortgage is calculated using the current rate. With variable-rate mortgages, porting is usually not available. This means that a three-month interest penalty will be charged if you break your existing mortgage, which may or may not be reimbursed with your new mortgage. While porting typically ensures no penalty will be charged when you sell your existing property and buy a new one, it’s best to check with your mortgage broker for specific conditions. (For example, some lenders allow you to port your mortgage only when your sale and purchase happen on the same day, while others offer extended periods.)

 

9. How do I ensure I get the best mortgage product and rate upon renewal?

The best way to ensure you receive the best mortgage product and rate at renewal is to enlist the services of your mortgage broker to get the lenders competing for your business once again, just like they did when you negotiated your last mortgage. A lot can change over a single mortgage term, and you can miss out on a lot of savings and options if you simply sign a renewal with your existing lender without consulting your mortgage broker. 

 

10. If I have mortgage default insurance, do I also need mortgage life insurance?

You may, depending on your circumstances and insurance needs. Mortgage default insurance is required by lenders if you have less than a 20% down payment, and is intended to cover the lender's interest in the property. By contrast, mortgage life insurance is an insurance policy on the homeowner, which will allow your family or dependents to pay off the mortgage on the home should something tragic happen to you. Mortgage life insurance is meant to protect the homeowner's family rather than the lender.

 

11. Are there any other risks associated with getting a mortgage that I should be aware of?

As with any major purchase, there are unscrupulous individuals looking take advantage of unsuspecting buyers. The best way to prevent fraud is to be aware of what it is and how it’s committed. There are two major forms of fraud that are worth being aware of and guarding against. Mortgage fraud is a crime in which information on a mortgage application is deliberately omitted or misrepresented in order to obtain a larger loan than the lender might otherwise have agreed to; title fraud occurs when the title to your property is transferred to another individual without your knowledge. That individual then obtains a mortgage on this property and disappears once the funds have been advanced. Unlike mortgage fraud, victims of title fraud haven’t been approached or offered anything  –  this is a form of identity theft. I will detail some of the red flags associated with these types of fraud as well as ways to protect yourself in my next post.

 

12. Are you being honest with me? 

Obviously, this isn’t something you can come right out and ask, but remember that everybody in the housing industry only makes money when you buy -- myself included.  Be skeptical, and if you have a question, ask it.  Don’t just assume that everyone is looking out for your best interest.  And don’t be afraid to get a second opinion.

What is a mortgage broker anyways?

When I got back into the world of lending and finance, I had a choice: take a job with one of the Big Five banks, or join an independent brokerage.

It didn't take me long to decide.

 

In my previous career as a Financial Advisor at one of the Big Five, I had processed hundreds of mortgage applications. Of those, maybe half were approved. The other half were turned down because they didn't fit into the neat little box that my institution was trying to fill. Mortgage brokers, on the other hand, don't expect financial circumstances to fit into neat little boxes. But more than that, a broker's work is based on what you want rather than what the lender wants, because the broker isn't employed by the lender -- he's employed by you.

 

In the past, brokers were seen as an alternative only for clients with poor credit, who needed to use private lenders to secure a mortgage. However, this has changed tremendously over the past few decades. Regardless of your credit rating, and regardless of your stage in life, mortgage brokers offer many advantages over traditional banks.

 

For instance, working with a broker can give you the benefit of having more options on who you want to deal with for one of the most significant assets in your financial portfolio. While a bank only offers the products from their particular institution, licensed mortgage brokers have access not only to hundreds of private investors, but also to over 90 institutional lenders, including credit unions, trust companies, and, yes, even Canada's largest banks. In fact, quite a lot of business is done with the chartered banks, and a mortgage broker can get far better terms than you would get at your local bank branch. This is because brokers arrange millions of dollars in financing a year, and because we make the lenders compete with each other to get those funds. A lone individual walking into the local bank for a new mortgage or renewal just does not have that kind of clout.

 

Each lender has different ways of structuring a mortgage that takes your unique circumstances into account. Some will be able to do a deal that others will not; some will allow you to pay off much more at certain times throughout the term than others; and some will even allow  you to do a zero-down mortgage, despite the new mortgage rules (and no, you will not be paying a large premium for this). Or how about the fact that the banks get to decide what you can and cannot afford based on inflexible ratios and calculations? Have you ever wondered if there was a lender that would actually trust that you know how much you can afford? And again, not pay a premium for this? Yup, there's a lender for that, too.

 

These are not fly-by-night companies. In fact, most of these companies have been around for decades. And in most cases, the ones that do "disappear" are actually acquired by chartered banks looking to expand their client base and increase the CDIC insurance they can offer on investments.

 

So these are many of the reasons that I decided to go the independent brokerage route. But of course, before you decide to trust someone to handle your mortgage, there are a dozen questions you should be asking  -- which will be the subject of my next blog post.

Sometimes things don't go as planned

This isn’t something I ever like dealing with. In fact I hate it.  When clients are going through a divorce, they are not at their best.  There are emotions running through them that they’ve never experienced before, and judgements may be affected.  That’s the line most lawyers will use when explaining why a prenuptial agreement makes sense, because the couple can divide things with clear heads before a breakdown.  That makes sense.

When you are going through this sort of thing though, you are relying on information the experts are giving you, and one thing I have come across recently is the selling of the matrimonial home. 

My client was going through a divorce, and had been referred to me by a friend.  She had her lawyer, she had her real-estate agent, and she had her bank.  She had gone to her bank and told them the situation, gone to her lawyer as well, and her real estate agent.  Everyone told her the same thing: if she wanted to stay in the house, she would have to pay her husband for his share.  She was told by everyone that she could borrow against the equity of the home to do this. Unfortunately, the house was worth $400,000, and they still had $340,000 owing.  Her bank had told her that they would only be able to lend up to a maximum of 80% of the home on a refinance under the new mortgage rules.  She was already at 85%, so she was out of luck.  She checked with her lawyer as well, and he said the same thing.

So, she came to me to see about a second mortgage at a private lender at a higher rate, just so she could stay in her home.

The problem was, she wasn’t getting the right information from anyone.
On an exceptional basis, certain lenders -- along with both CMHC and Genworth -- have been considering marital split payouts up to 95% Loan-To-Value as of late, not the 80% commonly thought.

With this in mind, we were able to refinance to $380,000 -- the full 95% -- getting her an extra $40,000 to pay out her husband.  And the kicker?  We didn’t have to go to a private  or subprime lender.  We did it right through her bank. It’s just that people didn’t know all the rules, and were too quick to just brush her off.

Tax Free Mortgages

In the United States, homeowners have been permitted to write off the interest on their mortgage for decades.  In Canada however, the CRA does not let taxpayers to write off their interest.  There is a way however to accomplish this here, but care must be taken!  Mainly, you need to be able to prove the money was used for investments, rather than personal expenses.

Sounds easier than it really is though.  A few key issues will help you on this path.
First of all, and probably the most important component of this whole “scheme”, is how the mortgage is structured.  When setting up the plan, make sure there is a way to have several components under the collateral, such as a line of credit, mortgage, even credit cards which can be held under the equity of the house.  Most lenders do offer these.  The point of this is so that you can track and report the interest in each independently, which is necessary for the plan to work.

Next, use the mortgage funds you borrowed for investments!  Its best to get in touch with a financial advisor to help with this, and they will more than likely tell you to also get in touch with your accountant to discuss what you are doing.  This isn’t something you want to do on your own, as there is a ton of regulations to follow, and the CRA does keep very close tabs on this.

The payments for the mortgage are all paid as you normally would, and as the principal on the mortgage is paid down, the line of credit component of the mortgage is increased.  The key here is when the room becomes available on the line of credit, you take that money and transfer it directly to investment bank account.  This can be set up automatically by your financial advisor. 

The money in the investment bank account can then be reinvested, and the money becomes tax deductable.  Your best to invest in conservative investment, not take on more risk than necessary.  Remember, the point of this isn’t to make huge profits off investments, but rather be able to make the interest on the mortgage tax deductable.
On average, a typical 25-year mortgage can become fully tax deductible in 22.5 years.
Typically, this sort of strategy appeals to professionals and high income earners, who have paid off at least 20% of their mortgage.  Their debt ratios will be low, and will have excellent credit.

The risks

There are obvious risks associated with the smith maneuver, as I have touched on a bit.  The financial benefits are indisputable and justify the risks to the right borrower. But if it isn’t executed properly, or if the homeowner spends the funds on something other than investments, you may get audited.  As well, make sure any tax refunds you receive are used to directly pay down the mortgage, as this will greatly speed up the process of converting the full amount of the mortgage to being tax deductable. 
There is some short term financial risk involved, if for instance interest rates go steeply up at the same time as the market where you have invested fall.  This is prevalent mainly in the first two to four years though, as risk is mitigated eventually from stockpiling equity.
Finally, as I mentioned earlier, the CRA does keep a close eye on this.  They don’t like loopholes, and as such will pounce on you if you abuse this one.