Sybil Johnson-Abbott for The Lawyers Weekly
October 9, 2009
Mortgage fraud has been around for a long time. It has many facets - it can be a very sophisticated operation or a simple and efficient transaction. In general terms, it is a type of title fraud where the fraudster develops a scheme to obtain mortgage financing under false pretences using stolen or fake identification or altered income statements.
Mortgage fraud has jumped off the charts in comparison to previous decades. For example, fraud claims in Ontario have increased to 136. Furthermore, LawPro statistics show that real estate is the hardest hit: 63 percent of the claims and 54 percent of the cost of fraud from 2004 to 2008 stem from real estate fraud.
So why is mortgage fraud increasing?
Despite the recent downturn in the economy, the market has been competitive. Lenders compete against each other for faster mortgage approvals, better interest rates and the ability to advance funds in record times. This fierce competition, along with technological advances in title searching, electronic registration, property valuation and underwriting have created an atmosphere fraudsters can easily manipulate. The need for personal contact has been virtually eliminated.
Given that mortgage fraud has been around for a long time, the law and principles surrounding mortgage fraud should have been settled long ago. But both Ontario and B.C. have struggled with the legal principles surrounding fraud.
The recent B.C. Court of Appeal decision, Gill v. Bulcholtz, , is evidence that courts are still grappling with how to deal with mortgage fraud. Gill is a classic fraud case in which the fraudster impersonated a homeowner and granted a fraudulent transfer to an accomplice, who then mortgaged the property - twice. The fraudsters disappeared with the mortgage funds, but left behind two mortgages registered against title to the property.
The appeal court found, in simple terms, that a mortgage granted by a registered owner who obtained title by fraud cannot pass any valid interest to the mortgagee and thus the mortgage is void. The mortgages were deleted from the register and the cost of the fraud was born by the lender - not the Land Title and Survey Authority's assurance fund as would have been the case if the mortgages had remained on title.
As a result, lenders cannot rely on the title search showing the mortgagor as the registered owner. Lenders must look behind the register to ensure that the current registered owner obtained title properly in order to verify that the registered owner is entitled to validly grant a mortgage.
Effectively, this means that lawyers will have to adopt a higher standard of care in completing mortgage transactions for lenders. Many lenders have already amended their standard instructions to instruct lawyers to look behind the register to determine if there have been any recent transfers or mortgages that would indicate fraud.
As fraud claims increase, lenders may require mandatory title insurance policies, since they provide fraud coverage rather than relying on the traditional solicitor's opinion. Although title insurance reduces the number of off-title searches required, there is still value to performing regular off-title searches as they could assist in exposing a fraud. For example, if a utility company confirms the request for change in billing information or the change in title with the real homeowner, it may be enough to prevent the fraud or trigger the solicitor to investigate further. The question for lenders is whether they can pass the cost of the title insurance premiums onto borrowers. And if fraud claims increase, it is likely that title insurance premiums will also increase.
Fraudsters are going to commit fraud whether or not preventative measurers are put in place. This means that solicitors will have to actively be on the look out for fraud. It also means that despite the pressures to do the transaction quickly, solicitors must take the time to verify the client and ask some tough questions.
Sybil Johnson-Abbott is an associate at Borden Ladner Gervais LLP in Ottawa and practises extensively in commercial real estate and land development. Contact Sybil Johnson-Abbott