Buyers grappling with a challenging market are increasingly tempted by fraud, writes Mike Bricknell, and it’s up to brokers to hold the line of integrity
In my early 20s, I purchased a condo in downtown Toronto and found myself working two jobs to be able to afford the home. Ultimately, I made the tough decision to sell the condo to break even.
That was 20 years ago, when mortgage rules were different. Changes have been made, with good reason, to protect buyers from the stresses I went through. But those changes have also led to more incidents of fraud as people attempt to get on the housing ladder in an increasingly difficult market.
With the combination of recent B-20 and B-21 mortgage regulation changes and spiking house prices across Canada, borrowers – especially first-time homebuyers – are feeling the pinch. Interest rates are increasing, forcing the big chartered banks to hike their posted rates. How can anyone purchase a home these days?
Dozens of websites list the documents lenders require from borrowers in order to provide mortgage financing. With this information readily available, there are people who are either coached or take it upon themselves to falsify documents in order to achieve homeownership, whether it’s by altering a stated income amount, changing the name on the documents or getting someone to write a false employment letter.
In the last two months, I have personally noticed an increase in potential borrowers looking for a mortgage when they only claim $30,000 in total household income. At this income level, families still qualify for the maximum child tax rebate and other government benefits, and pay lower income tax. But when they’re looking to purchase a home in a certain neighbourhood, house prices can be as high as $750,000 and more.
With an annual income of just $30,000, a purchase of this size would need a down payment of $670,000 or more. But these borrowers are asking for a mortgage with a down payment of between 5% and 20%, which is not reasonable in today’s market.
When I tell them what they can actually afford at the given qualifying rates and recommend some steps they can take for future home affordability, the clients typically go into hiding. When I reach out a couple of weeks later to follow up with them on their progress, and they report that they ended up purchasing the home with a different broker who could “get it done” with the same information they provided to me, I feel shocked.
After washing the salt out of the wounds brought on by the injustice for losing out on a deal I worked hard to close, I am left with two important questions.
To the borrower: Why are you purchasing a home you can’t afford? If you can’t afford to purchase a home right now, then perhaps it’s best to keep renting or living with family members. Continue to save for a larger down payment and closing costs, fix any existing credit issues, or purchase outside of your preferred neighbourhood. This is the smart decision, but increasingly, borrowers who cannot and should not be able to afford a home are somehow still making the purchase, leaving them at risk financially.
To the mortgage professional: Who is allowing this to happen? It is common knowledge that there are mortgage ‘professionals’ out there who will work with documents that have been altered, perhaps found on certain websites, to help a borrower achieve homeownership. Brokers who are found guilty of this can lose their licences to practice and are penalized for their unscrupulous behaviour, yet borrowers are still managing to buy homes far outside what their legitimate financial documents should allow them to qualify for.
Having been house poor in my early 20s, I don’t recommend it to anyone. The mental and physical stress you endure isn’t worth it just because you’re tired of renting or you want to keep up with your friends. The mortgage professionals who are allowing this to happen to pad their own pockets should think twice. It will eventually catch up to you, and all you’ve worked so hard to achieve will be stripped from you in the blink of an eye.
Mike Bricknell has been a broker for four years and in the mortgage industry for almost a decade, during which time he has worked with both banks and credit unions.