Mortgage Fraud in Canada: Where s the Problem? Credit Scoring & Risk Strategy Association Annual Conference June 2016

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1 Mortgage Fraud in Canada: Where s the Problem? Credit Scoring & Risk Strategy Association Annual Conference June 2016

2 Agenda About Teranet Background Defining and Understanding Mortgage Fraud Recent Trends in Mortgage Fraud Activity How Do We Solve a Problem Like Mortgage Fraud? Research Awareness Advocacy Technology Teranet s Mortgage Fraud Solutions

3 About Teranet Teranet is an international leader in electronic land registration and is the exclusive provider of online property search and registration in Ontario and Manitoba One of the world s most advanced, secure and sophisticated land registration systems Within the financial services sector, our understanding of the complete horizon of mortgage risk, real estate secured lending, compliance and monitoring equips us to help financial service professionals limit exposure and execute at a higher level From individual professionals to major institutions, property intelligence and market insight from Teranet can help financial service providers manage overall risk and drive efficiencies across their residential property market activities We offer widely used and trusted information solutions that deliver automated and costefficient access to reliable property valuations, fraud detection tools, portfolio analysis and market insight across Canada

4 Background As Canada s housing market continues to heat up, mortgage fraud may be on the rise Prospective buyers pursue the perfect house at all costs, and some industry professionals are all too willing to resort to shady tactics to help them This session provides an overview of recent fraud trends in both the United States and Canada, with specific attention to under-reported dimensions such as collusion between industry professionals It also highlights a number of approaches and solutions to monitor and prevent fraud not only during the adjudication process, but well after funding

5 Defining the Problem Two main types of mortgage fraud Fraud for profit typically involves organized crime and has the goal to deprive the funding institution of the full proceeds of the loan Characterized by use of straw buyers and fake identities, can also involve money laundering and/or tax evasion schemes Fraud for shelter aka soft fraud cases where a real buyer sincerely wants to purchase a home and pay for a mortgage as arranged, but does not qualify based on current income or other application parameters Typically involves misrepresentation of income, employment status, debt load, leverage, or factors related to the property being purchased/refinanced Overwhelming majority of mortgage fraud falls into the latter category, primarily at point of application CoreLogic estimates that 0.7% of all U.S. mortgage applications contain fraud Equifax has cited mortgage fraud as the most prevalent form of fraud in Canada

6 The Fraud Triangle (Donald Cressey) Pressure / Incentive Problem that s impossible to solve via legal means Can apply to both the consumer and the mortgage professional Opportunity Consumer can t qualify for desired home based on current salary Professional under pressure to meet sales targets A way to commit the crime and not be caught E.g. knowledge that lender has loose internal controls around income verification Rationalization Most fraudsters (in the mortgage industry) don t commit other crimes Everyone is doing it / I needed to do it to qualify / This loan will perform

7 Dimensions of Fraud for Shelter Employment Intentional misrepresentation of employer s name, length of employment, position, or other job related information Identity Altering, creating, or using a stolen identity to obtain a mortgage Income Intentional misrepresentation of income on a mortgage loan Occupancy Misrepresentation of applicant s intention to occupy property in order to qualify for reduced interest rates, lower down payments, or other incentives Property Misrepresentation of the true market value of a property Undisclosed debt Intentional failure to disclose additional mortgage debts and/or down payment leverage Multi-lien fraud taking advantage of time lags within the approval-to-close process to solicit multiple loans on a single property

8 Market Factors Driving Mortgage Fraud Activity Interest rates A sustained period of lower interest rates can lead to a decrease in fraudulent applications, as more purchasers qualify via normal means But an eventual return to higher rates can drive previously borderline loans into default Lower rates also can drive.. Overheating/overvaluation Overheating demand significantly outpaces supply Overvaluation price appreciation is not supported by economic fundamentals (household income, price to rent ratios) Prevalence of speculative activity, perceptions of market instability or lack of sustainable long-term value (driving lenders out of alignment with buyers) and potential for correction can all drive fraudulent schemes Overheating and overvaluation often lead to Regulatory changes Lower amortization periods, higher minimum down payments, higher mortgage insurance premiums mean less flexibility, especially for first-time buyers These changes drive marginal buyers toward riskier loans and/or shadier professionals

9 Recent Trends in Mortgage Fraud Activity United States MIDEX, LexisNexis Mortgage Fraud Index, CoreLogic Mortgage Fraud Report Application fraud and misrepresentation climbed steadily from , holding steady since Interest rate decreases produced an increase in well-qualified borrowers and overall equity positions, perhaps slightly mitigating the prevalence of application fraud Increase in misrepresentation pertaining to credit reports (aligns with recent Equifax findings in Canada) Increase in incidents involving collusion between multiple industry professionals Canada REDX Less than 10% of professionals in REDX subscriber-sourced database account for over 1/3 of total incident reports 80% of cases of misrepresentation discovered during initial application process 20% discovered during post-funding review/investigation In the majority of reported incidents of pre-funding alleged fraud or misrepresentation, nonsubscribing financial institutions continued to fund the mortgage Unverifiable employment documentation continues to be the single biggest trigger with regard to REDX reporting

10 Fraud Risk Hot Spots United States

11 Fraud Risk Hot Spots Greater Toronto Area

12 How Do We Solve a Problem Like Mortgage Fraud? 1. Research The full extent of the problem has yet to be quantified how much does mortgage fraud really cost us? Generally only anecdotal evidence is available Difficult for decision-makers to understand the impact 2. Awareness Goes hand in hand with research educating politicians, law enforcement, and consumers 3. Advocacy Legislative changes to facilitate information sharing e.g. Line 150 verification Without understanding of the scope of the problem and its cost, this won t happen 4. Technology Solutions exist, and more solutions can be built Will require a coalition of the willing to commit to making use of these solutions and sharing information as a community

13 Mortgage Fraud Solutions REDX REDX was launched in 2003, as a result of an industry task force initiated by CIMBL (Canadian Institute of Mortgage Brokers and Lenders) Teranet entered into an exclusive partnership with LexisNexis Mortgage Asset Research Institute to create REDX In 2005, Teranet was designated as an Investigative Body pursuant to the federal Personal Information Protection and Electronic Documents Act (PIPEDA) REDX is the only Canadian cooperative risk management service designed for the mortgage and financial services industries and is used by mortgage lenders, lawyers and title insurers as part of their due diligence on new or existing business relationships REDX is endorsed by Mortgage Professionals Canada (formerly CAAMP) Though REDX has had a successful run, its technology stack and user experience are out of date and it was time to go in a new direction In partnership with the mortgage industry and through the development of a new identity, enhanced value proposition and modern application, Teranet s goal is to reposition the former REDX solution within the marketplace to help mitigate incidents of fraud and to contribute to the betterment of the industry

14 Mortgage Fraud Solutions Introducing CommuniFI CommuniFI addresses the Financial Industry and introduces the concepts of mutual reliance and support. This respected community works together to build an information base the user can trust. CommuniFI means recognition and alliance.

15 Mortgage Fraud Solutions Introducing CommuniFI

16 Mortgage Fraud Solutions Introducing CommuniFI

17 Mortgage Fraud Solutions Monitoring & Notification Services Monitoring & Notification Services (MNS) detects specific land registration activities on properties and provides self managing monitoring models to detect specific registration activities over a given period of time The designated properties are those properties on which the client has pending or current interests, registered or to be registered in the Ontario Provincial Land Registry Office The Monitoring and Notification module allows the client to track the status of any active property in the Province of Ontario MNS monitors PINs for specific registration activity based on instruments registered on title An example is if there is a particular type of registration (i.e. subsequent transfer of title, new lien, new mortgage, discharge of existing mortgage) the client can be alerted through an if such an interest is registered

18 Mortgage Fraud Solutions Mortgage Registration Verification Lenders current wait and see method of confirming that mortgage registrations are completed, and completed correctly, may expose them to undesired risk Lenders wait up to 150 days for receipt of information from legal professionals to determine if their interest(s) are secured against property title This delay exposes lenders to risks related to: obfuscation of mortgage funds by legal professionals; incorrect registrations (wrong property, wrong amounts, wrong party names, etc); and non-registration of secured interests Mortgage Registration Verification (MRV) is a process for lender clients to monitor mortgage registrations done on their behalf by solicitors throughout the Province of Ontario Allows lenders to discover latency and inconsistencies between the funding date (date where the funds have been transmitted to the Solicitor) and registration information provided to the Province of Ontario s Land Registration Information System (POLARIS) Provides timely notification to lenders of registrations; errors associated to registrations by registering legal professional; ability to monitor accuracy of work of legal professionals; and notification of missing registrations

19 Mortgage Fraud Solutions Mortgage Lock The potential for mortgages to be deliberately discharged by anyone other than the lending institution can lead to financial loss for the lender as well as affecting the integrity of the Land Registration System Mortgage Lock prevents anyone but the owner of the charge or their designate from discharging a locked charge interest This control functions as a fraud prevention strategy, and also helps reduce the possibility of loss of chronological priority of mortgages due to administrative mismanagement, particularly when mortgages are being refinanced or assigned from or to another lender Mortgage Lock provides an additional layer of protection to lenders interested in assigning portfolios of mortgages to other lenders, or securitizing portfolios (to convert the cash flows from the underlying mortgages into mortgage bonds) in both such cases, it is imperative to help protect against unexpected discharges Protects the Lender s entire (Ontario title automated) mortgage portfolio regardless of the original Charge registration date (every discharge or switch opportunity is evaluated)

20 Mortgage Fraud Solutions Custom Mortgage Portfolio Analysis In CoreLogic s 2015 mortgage fraud report, undisclosed-debt fraud the practice of intentionally failing to disclose additional mortgage debts during the mortgage origination process was the only dimension (of six total) to increase YoY (Q to Q2 2015) It increased by 1.7% -- each of the other five dimensions decreased by at least 7% CoreLogic specifically called out the practice of multi-lien fraud, discussed earlier Teranet s research has shown an increase in low-ratio mortgages (at 75-80%) being originated on the same day as a private second mortgage (at 10-15%) effectively creating an uninsured 85-95% LTV loan Are borrowers disclosing this levered down payment to their primary lender? Only provincial registries can provide the necessary data to track and analyze these additional loans, whether originated at the same time as the first mortgage or at a later date