Battling mortgage fraud in the age of digital mortgages
By Ryan Lambert
It’s rare to go a week without seeing a headline around housing affordability, regardless of where you live in Canada. While there is always the “tale of two markets” for Vancouver and Toronto, overall mortgage carrying costs are going up; it’s an undeniable fact. Scotiabank estimates that they are going up by about 8%, driven by a combination of rate increases and the mortgage rule changes.
The recent changes to the Office of the Superintendent of Financial Institutions (OSFI) B-20 regulations require that a stress test be applied to every borrower. This further increased affordability concerns and created a significant amount of panic in the industry. Homebuyers are now required to qualify at the greater of 200 basis points above contract rate or the Bank of Canada’s posted rate (currently 5.14%). On average, these changes resulted in a 20% decrease in purchasing power. To put that number into perspective, late last year, Mortgage Professionals Canada suggested that just under one-fifth of mortgage borrowers would fail the stress test, meaning roughly 100,000 Canadians would have to compromise on their home (size, location, or rental).
With housing supply issues impacting prices, mortgage rates going up, and stricter qualification criteria, it’s fair to be perplexed about how so many Canadians can afford homes these days, especially first-time home buyers. One theory that’s gaining traction is that mortgage fraud is on the rise.
No, this isn’t the type of fraud where someone takes out a mortgage and then escapes with the funds. It’s a different type of fraud, broadly defined as ‘fraud for shelter’. While definitions vary, fraud for shelter comes in the form of little white lies that borrowers supply a lender when verifying their financial position. There are some estimates out there that suggest as many as 20% of borrowers “strategically try to withhold information or inflate their income through various means.”
Lenders are facing increased risk across their mortgage portfolios as more people struggle to afford their dream homes and may resort to falsifying pay stubs, employment letters, and employment confirmation. Fraud for shelter is often thought of as a victimless crime. What does it matter if a borrower fudges their income slightly to hit the underwriting ratios and pass a stress test, as long as they keep making the mortgage payments? OSFI takes a hard line on that as the bank is putting itself at risk, and to be quite honest, it doesn’t set the borrower up for success as they can struggle with unforeseen expenses, the burden of being house poor and the daily stress that can cause.
So how do lenders get in front of this growing risk, and how do they do it without adding more friction to the lending process and the borrower experience? After all, the mortgage industry is still highly competitive and Canada is on the cusp of a digital mortgage revolution, similar to what Rocket Mortgage kicked off in the US and beyond.
In the coming weeks, FCT is eager to exit stealth mode and share more about our Automated Verification Product (AVP). By accessing data available directly from the source and using multiple data points to validate against fraud in new ways, we are well on our way to helping lenders combat fraud for shelter. We have an ambitious pursuit–highly reliable, highly secure verification in three clicks. We can’t wait to tell you more about how we are bringing the first version of our product to life!