Mortgage brokers calling for tighter regulations in wake of alleged fraud

By Alexandra Posadzki


TORONTO – Mortgage brokers are advocating for tighter industry rules in the wake of allegations that dozens of brokers working with Home Capital Group Inc. falsified client income information.

Home Capital (TSX:HCG) announced late last month that it had suspended 45 brokers for allegedly committing fraud on mortgage applications, leaving the industry in damage control mode.

Walid Hammami, a Montreal-based broker with Dominion Lending Centres, says the incident illustrates a larger systemic problem with mortgage fraud. There are likely more transgressors than the 45 identified by Home Capital, he says.

“These guys not only give us bad press, but they are also unfair competition,” Hammami said, noting that brokers who play dirty by falsifying income data are stealing business from those who follow the rules.

Rather than taking the appropriate steps to qualify for a mortgage, a process that could take some time, a client could simply find a broker willing to forge the documents and get approved immediately, Hammami said.

“It’s like people using steroids in sports,” Hammami said.

Experts say that as lending rules have tightened and competition from the country’s major banks has increased, brokers are fighting for a slice of a shrinking pie.

“Not only has the industry become more competitive, the underwriting rules have tightened,” said Tony Piattelli, a Calgary-based broker with Quantus Mortgage Solutions. “So they’re getting squeezed on both sides of that equation.”

That can spell trouble for those relying on commissions from mortgage deals to cover living expenses and support their families, experts say.

“When you make it tougher to make a living, those that are so inclined will start to work around the rules,” said Blair Anderson of brokerage Anderson Associates.

Tougher educational requirements might help. Currently, an individual wishing to become a mortgage agent has to score at least 60 per cent on a mandatory course.

“I think maybe they could weed out a few bad apples by raising that standard a little — even just to 65,” Anderson said.

Some brokers have suggested more ethics training. However, Hammami says it’s easy to “talk a big game” about ethics.

“Applying it is a different story,” he said — especially for those facing a dire financial situation.

Some brokers, including Hammami and Piattelli, say regulators or employers should ensure that those just starting out in the industry have a backup plan — such as a substantial amount of savings or access to a line of credit — to help sustain them in case commissions fall short.

That could help prevent them from making poor decisions due to financial stress.

“You have to have a bit of a war chest,” Piattelli said.



Mortgage fraud on the decline in Canada, Genworth CEO says

Mortgage fraud has been on the decline in Canada in recent years thanks to tougher regulations, better training and new technology, the head of Canada’s largest private mortgage insurance company said Wednesday.

“The industry takes misrepresentation very seriously and as a group we’ve all taken some very strong actions over the last few years to reduce instances of misrepresentation and fraud in the industry,” Stuart Levings, chief executive officer of Genworth MI Canada Inc., said in a Wednesday conference call with analysts.

Mr. Levings’s remarks come a week after Home Capital Group Inc., a major Canadian alternative mortgage lender, revealed that it had suspended 45 mortgage brokers after it uncovered evidence that some borrowers had been approved for mortgages with fake employment letters that overstated their incomes.

Home Capital has said its mortgage insurers conducted audits after the company disclosed problems with some of its mortgages and it was confident that its loans would be covered by insurance, given that none of its employees were complicit in any fraud.

Mr. Levings declined to discuss Genworth’s dealings with Home Capital, but he said fraudulent mortgage applications have become less of a problem for the mortgage industry in the wake of the global financial crisis.

As a major mortgage insurer, Genworth uses highly trained underwriters, along with a special investigations unit and “third-party tools,” to act as “a second set of eyes” in order to uncover issues with the mortgages it insures, Mr. Levings said.

The company also provides “red-flag training” for the lenders it works with. “We don’t see a lot of [fraud] getting through to the approval process,” he said. “You want to catch it at the front door.”

The company rejects roughly 7 to 10 per cent of all loans, he said, while others go back and forth between the lender and insurer to work out any issues with the application.

Genworth investigates claims on a case-by-case basis, but it is committed to paying all valid claims to lenders if a mortgage defaults, Mr. Levings said. The commitment is crucial to the company’s plans to increase its share of the Canadian mortgage insurance market, which now stands at close to 35 per cent.

Genworth could refuse to pay out a claim if it finds “unmitigated, recurring material deficiencies in the underwriting process,” Mr. Levings said, something that he added was “a very rare occurrence.”

“On balance, the quality of the loans in the market as a whole is very strong in today’s environment,” he said.

READ MORE HERE: Mortgage fraud on the decline in Canada, Genworth CEO says

Morton Dew shut down, under investigation

Source: CBC News

A financial planning business in Charlottetown has been shut down and is under investigation by the provincial government.

A spokesperson from the P.E.I. Department of Justice has confirmed to CBC News that Morton Dew Ltd. and Cuddy Financial Management Group are under investigation.

The statement also names Frank H. Dew and David H. Cudmore.

“The individuals (Dew and Cudmore) are no longer licensed to trade in securities or insurance, and can no longer conduct business either themselves or through a company,” the statement reads.

The businesses and individuals are being investigated under both the Securities Act and the Insurance Act.

The province is asking that anyone who has had dealings with the four named parties contact Phillip McInnis at the Department of Justice.

Home Capital suspended mortgage brokers after anonymous tip last fall

Home Capital Group Inc. began suspending mortgage brokers after its board of directors received an anonymous letter last fall complaining of “irregularities” about the income documentation of some of its insured mortgage borrowers, company officials confirmed Thursday.

The company, which operates as one of Canada’s largest alternative mortgage lenders through its subsidiary, Home Trust, said it has stepped up its underwriting procedures, including establishing a dedicated team to investigate income verification for borrowers in its insured mortgage program after it found evidence that some borrowers had submitted fake employment letters.

In many cases, the borrowers actually worked at the companies listed in their employment letters, but earned less than they claimed. “Some of the letters had been altered, where an employee who actually made $64,000 a year reported making $84,000,” Home Capital CEO Gerald Soloway told a conference call with analysts.

Home Capital said in the past it had simply checked whether the name on the letterhead matched the name of the employer listed on the borrower’s credit bureau and then accepted the documents without contacting the employer to verify the income. The practice met the standards of mortgage insurance companies, including the federal government’s Canada Mortgage and Housing Corporation, the company said. It now takes extra steps to verify a borrower’s income, including calling a company’s human resources department and senior executives.

The company said the suspect mortgages represented “a very small share” of the company’s overall portfolio, contributing roughly 2 per cent of net income last year.

No Home Capital employees were complicit in any fraud, the company said. The firm cut ties with 45 individual brokers, although it said there is no proof that any of the brokers were actually involved in creating fake employment letters, or simply guilty of passing on bad information.

Home Capital said it alerted federal regulators and the mortgage insurance companies to the problems with some of its mortgages “very early on. All mortgage insurers have since conducted audits and the company said it is confident the suspect mortgages will still be covered by mortgage default. None of the loans have defaulted and they have actually been performing better than the company’s overall portfolio, Mr. Soloway said. In many cases, the borrowers have other family members living in the home who are helping to pay the bills, he said.

“We are comfortable that this is not a credit event,” said company president Martin Reid. “We do not anticipate any higher arrears or losses as a result of this.”

Aside from new underwriting procedures the company has also moved to separate its underwriting and sales teams, a process that has “caused friction” with some brokers because it has slowed down loan approvals, the company said.

Home Capital’s stock has been in freefall since it warned of a drop in mortgage originations in the second quarter because it had cut ties with some mortgage brokers. By early this week it had become the second most shorted stock in Canada. The stock jumped more than 12 per cent after the company’s disclosure Thursday morning.

Mr. Soloway characterized the problems with some brokers as short-term setback in Home Capital’s otherwise strong growth story and defended the company’s long-term prospects. “It’s not the way some people have interpreted it [as if] the whole company is shaken,” he said. “It hasn’t affected our ability to move forward.”

Home Capital reported diluted earnings per share of $1.03 in the second-quarter, flat compared to the previous quarter and down from $1.05 per share a year earlier. Net income was stable, falling just 1.9 per cent to $72.3-million in the first quarter compared to the same period last year.

JP Morgan Chase to Pay $388 million in Mortgage Securities Case

By Don Gil Carreon | Franchise Herald

JPMorgan Chase & Co will pay $388 million in exchange for settling a lawsuit by investors who claimed they were misled by the bank on the soundness of purchasing $10 billion worth of residential mortgage-backed securities it sold before the financial crisis.

A Reuters report on Friday said that JP Morgan is setting the lawsuit filed by the Fort Worth Employees’ Retirement Fund and other investors, which accused the bank for misleading them about the underwriting, appraisals and credit quality of the home loans underlying the certificates. After the 2008 collapse of Lehman Brothers Holdings Inc., the certificates were worth 62 cents on the dollar at most, the investors said.

Reuters, however, added that JP Morgan maintained that the drop in the value of the certificates was not reflective of the quality of loans, but due to the deteriorating economy.

Another report on Bloomberg said the settlement was filed in a Manhattan federal court, where a judge will approve the settlement or not.

Bloomberg cited a statement from the plaintiffs, saying the leadership of the pension funds helped protect their investors’ savings and maximized the recovery of the assets by committing to the trial of such action.

Both reports noted that JP Morgan had agreed to pay $13 billion to settle a Justice Department lawsuit alleging that the bank misled investors in mortgage-backed securities about the soundness and risks of the investments that helped bring on the subprime-mortgage crisis of 2008.

The U.S. government said it was the largest settlement in history.  The lawsuit was part of wider effort of the government to hold the country’s largest banks accountable for engaging in lending practices that contributed to one of the worst economic crises in the U.S.

Reuters reported that the Justice Department said JPMorgan admitted then of having sold mortgages to investors that should have never been sold.  The bank, however, said in a separate conference call it had not admitted violating any laws and does not believe the facts it revealed may be used against it in other lawsuits.

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