Liar loans helping to inflate hot housing markets, experts say

A number of mortgage brokers who are accused of committing fraud to secure home loans for customers in Ontario are still actively operating, says the head of the lending company that extended them the money.

“Some of the same brokers are still in business,” Gerald Soloway, chief executive of Home Capital, said on a conference call Thursday.

Soloway said Home Capital, the largest non-bank mortgage lender in the country, alerted regulators after an internal review showed several dozen independent brokers it did business with lied about customers’ income levels to get home loans approved.

Regulators are “aware of who we’ve had an issue with,” Soloway said. The brokers in question “may well have reformed their processes” since Home Capital stopped doing business with them this spring, he said.

MORE: Home Capital cuts off 45 brokers for falsifying loan applications

Soloway sought to assure that the incident was minor in nature and didn’t reflect a slippage of lending standards at Home Capital, which specializes in lending to customers unable to attain a loan from more risk-averse lenders, like a chartered bank.

“In total, this was 45 brokers out of our nearly 4,000 broker relationships – 45 out of 4,000,” Soloway said. This “small number of brokers in no way represents the majority we transact with us and who work very hard to ensure that the quality of business meets our very high standards.”

The brokers in question originated roughly $1 billion in home loans primarily in Ontario before being cut off by the lender between September and March.

Significant correction

The allegation comes as economists raise fresh warnings about lofty Canadian home prices, notably in the Vancouver and Toronto areas, where prices accelerated again this spring.

A fresh report from TD Economics released Thursday said several indicators, such as home prices relative to incomes and the current elevated level of home construction, are flashing warning signs.

MORE: Rate cut risks sending Vancouver, Toronto home prices ‘off the charts’ 

“When we put it all together, key housing indicators on balance continue to highlight the vulnerability of the Toronto and Vancouver housing markets to a significant correction in activity and prices,” Derek Burleton, the deputy chief economist, and Diana Petramala, economist at TD, said.

TD’s outlook continues to call for a “soft landing” in home prices – something that’s already started in markets outside Toronto and Vancouver.

Growth pressures

Critics who suggest Toronto and Vancouver are bound for a crash say the Home Capital incident reflects a market place running out buyers and is “reaching” to secure larger and riskier loans for customers who otherwise shouldn’t be getting them.

“The household earnings of Canadians have not grown with prices for homes and condos. So industry workers are taking measures, in this case fraud, to get people into homes they cannot afford based on incomes,” said Hilliard MacBeth, an investment portfolio manager for Richardson GMP in Edmonton.

MacBeth said he hoped regulatory officials were ratcheting up scrutiny on loan approvals across the industry. “The same growth pressures exist for every lender.”

Soloway said new verification mechanisms were already in place at Home Capital following its own internal review.

Performing better

Soloway said Home Capital hasn’t seen any deterioration in the questionable loans to date. “The performance on the group of files, surprisingly enough, is better than average,” he said.

Soloway said that multiple people – “generations” – who were living in the home were likely helping make the monthly mortgage payment.

While borrowers’ incomes were deliberately misstated, credit scores and home appraisal values on the mortgages in question were accurate, he said. Still, Soloway said there’s zero tolerance for fraud.

“We can’t tolerate and won’t tolerate any information that’s not accurate.”