A routine audit is leading a Canadian bank to repurchase their “ineligible” mortgages. Montreal-based Laurentian Bank is agreeing to buy back over $125 million in mortgages. The agreement is the result of a routine audit from the Canada Mortgage & Housing Corporation (CMHC). This comes while the bank is trying to improve borrowing standards, after a different third-party audit revealed similar issues.
It’s Not Fraud If You Don’t Collect Documentation, Right?
Laurentian Bank announced an audit of mortgages sold to a TPP revealed “documentation issues and client misrepresentations” in December. Most of it is due to failure to obtain or properly store documents on the borrower. The bank also found “client misrepresentation” to a “lesser extent.” It’s unclear how they know the loans with missing documentation are not “misrepresentations,” but whatever. They did note that these loans are performing in-line with their expectations.
The audit resulted in Laurentian announcing they would need to buy back a few … hundred million in mortgages. In December they had announced it would be up to $304 million. The company noted in their 2017 annual report that, “no employees were implicated in any misrepresentations and the documentation issues appear to have been unintentional.” Not sure if screwing up $304 million in loan documentation by accident makes this better or worse.
Laurentian Bank Will Buy Back An Additional $115 Million of “Ineligible” Mortgages
Nope, that wasn’t all. Yesterday the bank announced a routine audit from another party found “similar issues.” CMHC, the government Crown corp in charge of mortgage liquidity, found mortgages that were “inadvertently portfolio insured.” Issues were found with both mortgages sold to the CMHC’s securitization program, as well as those only insured by the Crown corp.
CMHC has cancelled insurance on those that were improperly insured. The bank will repurchase those sold to the securitization program, once a third-party audit verifies the results. Laurentian estimates it will repurchase between $125 and $150 million.
Laurentian Bank CEO Argues It’s Not An Issue
Once the bank became aware of the issue at the end of last year, they took steps to reform the borrowing process. The bank believes the mortgages “do not represent a credit issue as they are all performing in line with the Bank’s overall mortgage portfolio.” Defaults are always low in a bull market, but that’s a lesson for another day.
The Downside Isn’t Credit Defaults
Mortgage brokers always get wound up when we point out the mortgage market has issues. The problem isn’t the loans themselves. As Laurentian Bank points out, these loans are performing just like other loans. There’s nothing that shows they’ll be of any worse quality at this point.
The problem is a significant number of people contributed to the Canadian real estate market, by slipping through the cracks. They drove prices higher, while many technically should not have been able to do so. As mortgage lending standards improve, the market weeds these buyers out. When this segment is removed, dollar volume drops significantly. Banks have already been forced to remove people buying “too much home” through B-20 Guidelines. Now they’re tackling those that may have needed to fudge documentation to get those loans. The buyer pool is shrinking, and with it goes liquidity at higher prices.
Like this post? Like us on Facebook for the next one in your feed.
Photo: Sergio Ortega.
I know it’s hard for banks to enforce what every single channel does, but they need a better system. Something as simple as all documents need to be uploaded before the loan is approved, and it needs to be signed off by someone off-branch.
Poor documentation is a huge problem, and I’m guessing as banks dive into it, they’ll find much more of this stuff.
Agreed. This is an example of poor records management – there needs to be greater fail safes and checks.
This is an example of mortgage fraud enabled in part by poor records management.
Why are you just repeating what I said like your adding to the conversation?
Because your comment sounds a lot like an attempt to spin a mortgage fraud as a mere records keeping problem.
Adding anything to the conversations geared towards legitimizing fraudulent activities in Canadian RE markets is the least of my concerns.
Yeah, gotta side with MH on this. This is fraud, not someone misplacing some background info…if a bank like Laurentian (a flea on the ass of our banking system) in in hock for a combined $300M+ of bad mortgages what do BMO and NB have. Further to this, the HSBC of Canada aka CIBC + Scotia love fraud and are generally complicit in major scams, take the fine and then keep printing money.
MH – THANK YOU for calling it what it is – FRAUD!
Lying and fraud are a huge problem. This is not a clerical or process issue like you’re suggesting. I agree once the banks dive in a lot of the muck is coming to the top and while there is 0% of this causing a meltdown what it will do is further increasing borrowing standards are the banks. As we’ve seen they are willing to go it alone, outside of the BoC. This will be a big problem for anyone renewing in the next 12 months, very very bad.
There are 2 essential elements of criminal fraud: Deception and Deprivation. Both must exist to have “mortgage fraud”.
Misrepresentations made on a mortgage application don’t become “mortgage fraud”, unless the misrepresentations cause the lender to suffer some sort of financial loss.
Exactly, borrowers abuse the system, while those that aren’t willing to, get fucked over in the buying process. As prices rapidly increase, so does the incentive for mortgage fraud. If you don’t commit mortgage fraud, welcome to renting for the rest of your life.
I’d rather be a renter than someone that lies on a mortgage application, but it’s REALLY annoying to see these people as happy homeowners.
“Happy”
If these borrowers are paying their bills, I don’t see the problem. Some people abuse a system that implements safeguards for people that don’t need them.
As long as prices are going up, you could make the argument that no safeguards are necessary at all.
If you buy too much house and the payments get to be too burdensome, list your place, sell in a week for a higher price, pat yourself on the back and call yourself a financial wiz……………… Prices only go up right?
Now that rates are on the way up, and sales numbers and prices going down, these people with liar loans won’t be able to renew as the bank won’t qualify them, and they can’t shop due to B20.
THE RE whistleblower is here. Welcome back. how big is this bank. 125M buyback is nothing, this might be around only 400 mortgages at max. The big 6 has to be audited, that’ll show some real sh*t.
Small portion of their book, but concentration and distribution is key. These are high ratio mortgages, so they most certainly contributed to a rising floor of prices. Especially since they only really operate in Quebec and Ontario.
Agreed though, the Big Six will likely have a lot more, since these issues were created at the branch level. Unfortunately, the Big Six won’t tell anyone if it happens, since the bank is claiming it was voluntarily disclosed and not material information for shareholders.
Also agree that the biggest issue isn’t these borrowers, but improved methods to remove these kinds of borrowers will reduce the number of “qualified” buyers. Note the quotes.
I’d say 8 out of 10 mortgages are fraudulent …Ppl fake NOA , employment letters ..you name it…If they really want to do it right – have the bank call CRA and confirm income ..How hard it is ?
I am a Mortgage Broker in BC, and I agree with your commit, except it is more like 50% fraudulent…. Most of it at Branches
Hafshik…I think you have that reversed. Most fraud would come from the broker channel, not the bank branches. I work in the industry and when I have done channel checks in the past on adjudication criteria, guess which channel had significantly more concerning practices? Yup, the brokers. I don’t know you personally but you very well may be a reputable broker, but the fact of the matter is that some of your counterparts in the industry are far from reputable and have been helping borrowers with income falsification for many years.
CRA will not confirm income to a third party without consent of the taxpayer because they rightfully protect taxpayer privacy. A T1013 must be on file (an accountant doing your taxes would have done one, for example), so a lender can’t just dial up CRA and ask for random taxpayer’s private information. This same protection of privacy occurs when lenders do employment checks at many large employers – the HR depts won’t confirm anything to protect employee privacy. Yes, misrepresentation exists in lending, but not at an 8 of 10 level. Yes, lenders can do a better job papering files, but they don’t willingly turn a blind eye to fraud. Bad eggs exist in any industry, and sometimes the lender rep just doesn’t know they’re doing something wrong (poor training or inexperience). All said, bringing examples like Laurentien to light is a good thing. It happens at the Big 6, too, they just bury it.
**20 years of mortgage lending management is why I can say the above. Yes, I see & report fraud.
Now all we need it these res agents to be banned from practicing being mortgage brokers at the same time….LOL only in Canaduh!
So how many “fraud” claims now on Canadas lenders?
Gus is right, our means of measuring and mechanisms to deal with the calamity
are outdated. Our philosophy about it is even more outdated.
Interest rates and mortgage regulations are a clumsy, terrible way to deal with increasing wealth inequality leading to over-speculation and consequential under- supply. The proof of that is self-evident,
Deal with foreign ownership by dealing with foreign ownership regulations. Deal with speculative RE hoarding by dealing with speculative hoarding regulations.
The way things are, it’s like setting speed limits on the highway based on
raising and lowering the cost of gas, accident insurance and attendant medical care. Sure it would have an effect, but the “unintended” side effects would be horrendous.
lollllllllllll, ‘ Montreal-based Laurentian Bank is agreeing to buy back over $125 million in mortgages. ‘
Here we go, one thing i do know. Our governments are corrupt to the core in this country, especially Quebec and in turn Ottawa, as they do run Ottawa now. $$$, So this is just a tip of the iceberg…lollllllllll
Lets just see how long they can hide all the other shady loans, fraud really going on in the banking system just like in government.
When the tide goes out, you see who was swimming naked.
For those who still doubt BoC is planning to hike in July:
http://business.financialpost.com/news/economy/bank-of-canada-holds-interest-rate-at-1-25
Between now and the end of 2019 an average forecast among all Big Banks predict 4 more hikes of 0.25% each.
Good, and rates should be much, much higher…this will be fun to watch from the sidelines…a big POP, for years to come…lollllllllllllllllllll
CAD to USD is up on that news… but BoC is taking their sweet time. They don’t want all those people who took out huge mortgages to go bankrupt, essentially they are rewarding risky behaviour. I guess they are expecting the US to pull out of NAFTA too
But but but, the RE agent told me that homeowners and their debt now held the BOC hostage and that they wouldn’t be allow to raise rates anymore!
lol…been speaking with people who 3 months ago thought the BoC and ‘the fed’ were the same. Same people are now trying to give me ‘the down low’ on policy direction based on what their RE agent/work colleague/family member/guy on the street is saying. I literally had someone a week ago tell me rates can’t go up anymore (Never…they honestly believe we’ve hit the cap) because it will kill housing and destroy Canada and investment and oil and blah blah blah….I told him we needed to have normalized rates 2 years ago and no one should be borrowing money under 4% because then we make bad decisions with asset bubbles being the biggest issue. Tried to explain tulips. Person felt it wasn’t comparable. I asked ‘How so?’ and they mumbled something about renting or land and we starting talking about boob jobs for our wives…true story. BD4L.
I’ve heard boobs are in a bubble right now. Id be putting my money into my wifes ass
Used to work as FA at a big bank for over a decade…….bankers used to have low turnover and be responsible for the quality of the credit they signed off on. Then came the competition from the brokers and banks wanted a share of pie.
Banks were willing to close their eyes to fraudulent documents. We were told not to bring up inconsistentancies because it was none of our business, it was the broker channel. At a meeting a cmhc rep said they did not care about fraud in housing for prim residence, because defaults were low. They only cared about grow op kind of fraud, because they lost money.
Broker sponsored shows like hot property did their bit in demonizing bankers. Embedded community based brokers were willing to bend the rules. They would help clients arrange the fake docs. Update credit report with fake employer and a phone number to verify employment. There were a lot of people complicit in the game.
If fraud was noticed, a bunch of brokers or bankers were fired but everyone higher up got a bigger bonus.
Interesting. Massive fraud will definitely be revealed during the next housing crash. The big question is how bad is that fraud issue and what are the volumes. Not sure if we have any ability to estimate it beforehand.
Laurentian Bank, which was described in this BD article was on radar for fraud issues for a while and there are some leaks from CHMC insiders that Home Capital Group is in terrible shape as well and has so much fraud that it should be closed completely.
I’l harp on about my favourite topic: Alt lending. Who cares about bank exposure? Many will still pay off their loans. Others will sell at a loss while a small number will declare bankruptcy; in all 3 scenarios the banks win. They specialize in mitigating risk and have debt and equity instruments to recapitalize (that will NOT be required btw). What about the guy who couldn’t even lie his way into a mortgage in 2014-2017 and had to use Community/Alt lending? Ask anyone who has looked into community lending; in the vast majority of cases the lending was short term bridge to get in and out of a property within 6-24 months. Not 20-30 years. Even if the lender/community can maintain the payments on their loan, go and tell someone they can get their money back but just need to wait a couple decades (vs a couple years) and you’ll see their face go white. Even if you just want the principle back and no profit we’re talking 10 – 15 years but then your money has been dying a slow death instead of returning min 2.5% via bonds….anyway I’m done but care less about the banks and more about your neighbour. BD4L.
Not to mention the big banks know a lot of their bad debts will get bailed out by taxpayers. One comment on street lenders. The only one I know doesn’t actually have the money he lends out. He owns an apartment building where the big banks allowed him to take out a HELOC to the tune of 4 million. He borrows that at about 3-4%, then lends it out at 12-15% to those the banks wont touch directly, or to provide secondary mortgages.
He likes to brag about his underwriting standards (tried to pitch me on getting in on that sweet action) as he has never had to power of sale anyone……. although he admits he has come close a few times. Told me he has had to slap a few missed payments onto the outstanding principal, but has always been able to get his cash back when they refinance………Recently he hasn’t been bragging as much…………..
Got side tacked there but main point I’m getting at; The banks might be tied to a lot of the alt lenders via HELOCS.
Bit of a Treaty of Versailles type economy. US(big banks) get paid back by the solid borrowers (Alt lenders) provided that they get paid back by the Germans (subprime)……… What can go wrong?
Solid borrowers being France and England……. Jesus got to pull myself together today
Totally agree Grizz and I forgot that layer: unless you’re lending your own money someone is backing you and there is a trickle down. When I think about it, with only one HELOC per property and it is a % of the value (generally backed by some equity/$$ in the property) again the banks win. The banks have set themselves up over the last 20 years to make housing money regardless of the cycle…that’s why I don’t listen to what they say but watch what they do. GS in the USA is a example of a bank/lender who’s PR isn’t even worth the digital paper it is digital printed on…guess what they are doing now which started in the last year I believe? Actively lending to the subprime market so they can ‘track the housing/credit cycle’ more closely…but the economy is fine right? That’s what they’ve been telling the masses…glad everyone here is living in the light. BD4L.
Blue and Grizz, you guys are correct, HELOCs, private lenders and 100% LTV mortgages that’s what will spark RE crash because of their risky practices.
But as soon as we are in full correction with unemployment growth, equity drop, default increases all those subprime things will become secondary. What will become primary is the equity drop and this is a huge issue.
Here is a very nice research done on that topic regarding 2008 US housing crash (NBER Working Paper No. 21261 link inside):
http://economistsview.typepad.com/economistsview/2015/08/the-us-foreclosure-crisis-was-not-just-a-subprime-event.html
I’m now doing research where we are at in Canada, and that’s quite difficult because not all the necessary stats collected by the government or not shared with the public, but what I can tell you for sure is that if RE prices will drop 60% we will have almost 40% of ALL households with mortgage in Canada underwater when all their debts will exceed their assets.
40% of all households it a huge number because only 5% bankruptcy rate in US caused that chaos in US RE market and significant price declines.
Definitely not all those 40% households will declare bankruptcy, but we have 5y fixed mortgages at most which means when their term is over:
– will they be able to renew mortgage with negative equity? – big question
– refinance? – definitely no
– switch banks? – nope
– sell/move/upgrade property? – no way
– forced to pay off HELOCs and all equity related debts – absolutely
and those are perfectly valid, creditworthy homeowners who are committed to pay off their mortgage, but because they have negative equity there is no guarantee even that their own bank will renew their mortgage.
US didn’t have this issue because they have 30y mortgage terms.
Good luck, Canada.
Well watching what they do. The canadian bank execs began unloading their properties in 2016
https://www.huffingtonpost.ca/2016/06/16/bank-execs-put-homes-on-sale_n_10508922.html
Good info Xelan
Thanks Grizz. I haven’t heard about that “dumping properties” think, thanks for sharing that. It’s a big development and definitely a “smart money” move.
I heard about CEO of one of the big 5 banks dumping own shares recently.
Unfortunately I can’t find any links in the news for that.
The T1013 is not needed if you have the taxpayer in front of you….You call CRA when the customer is with you , they confirm their identity with CRA and authorize verbally for information to be given over the phone…It works for one time only requests…The thing is – nobody benefits from that…also, before the NOA were these pale blue more sophisticated papers …now they changed the design and if you have ‘My Account” you print it yourself…It’s like it’s begging to be forged..
US Housing Bubble Timeline
Mid 2005 – Housing sales volume peaks
Mid 2006 – House prices peak
Early 2007 – House prices decelerate aggressively/go negative
Mid 2007 – Significant subprime problems
Mid 2007 – XLF Peaks (US Financials ETF)
Sept 15 2008 – Lehman Bros Bankruptcy
March 2009 – XLF bottoms (>80% drop from peak)
Do you guys think Canada will follow a similar timeline? Where do you think we are currently? To me it looks like we are in the early-mid 2007 phase when comparing with their bubble.
We have our own way. Chronologically we are still around 2005, but we already have nationwide price declines which US didn’t have till 2007 so it can speed up the things.
https://mobile.twitter.com/xelan_gta/status/1000856978602823680
My guess is early 2007. Haven’t had our country wide moment yet. Keep a close eye on the home caps of the world
Thanks @Xelan_gta, it does appear we have the declines without the other deteriorating metrics. In that way the house prices look to have rolled over ala 2007, but other metrics ~2005 as you mentioned. IMO this looks very bad for the housing market because these other metrics could spillover at the worst possible time.
@Grizzly Gus Yes, other noteworthy dates:
-January 11, 2008 – Bank of America announced that it planned to purchase Countrywide Financial
-March 2008 – Bear Stearns ‘sale’
Interesting to note that in the case of Home Capital, we did in a way have a ‘moment’ May 2017, with the Warren Buffett LOC, etc. shortly after.
No problem. Mark. Home Capital near-collapse was definitely a warning sign and I believe this story is not over yet. I deeply respect Warren Buffett but betting on subprime lender in an overpriced and overleveraged RE market is beyond my understanding. Time will tell if this bet was correct.
Now we have Laurentian Bank, just a while ago we had syndicated mortgages fraud arrests – those warning signs are everywhere.
Misrepresentations made on a mortgage application don’t become “mortgage fraud”, unless the misrepresentations cause the lender to suffer some sort of financial loss.
What? CMHC would definitely not agree with you.
https://www.cmhc-schl.gc.ca/en/co/buho/plmayomo/plmayomo_004.cfm
Also there is a consequences section for you:
Borrowers who misrepresent information and straw buyers who allow a property to be purchased in their name are committing mortgage fraud and will be liable for any financial shortfall in the event of default. They may also be held criminally responsible for their misrepresentation.
Pay 1% of the mortgage amount, you can get any amount of mortgage approved. Agents arrange all documents, you need to provide only signature and 1% of the loan amount. This is the situation in Scarborough ,Mississauga and Brampton
aka know as the lowest avg income households in burbs of the GTA =O