Fudging - aka - Lying

n. fudge
· A soft rich candy made of sugar, milk, butter, and flavoring.
· Nonsense; humbug.

v. fudged, fudging, fudges
· To fake or falsify: fudge casualty figures.
· To evade (an issue, for example); dodge.
· To act in an indecisive manner: always fudged on the important questions.
· To go beyond the proper limits of something: fudged on the building code requirements.
· To act dishonestly; cheat.

I could tell a story or two about fudge (not the candy) of the mortgage fraud variety of which I have some fairly detailed knowledge. If I did tell some of these stories in their entirety, I am certain I would get into some sort of litigious situation.

In the effort to stay away from lawyers and out of trouble with my employer I will tell you about some scenarios of which I have no personal knowledge, do not involve anyone I know directly and I cannot verify the facts. I can say with certainty that I do not doubt the truthfulness of these scenarios based on my experience. These scenarios come to me from people I know in the financial planning business who do not work for the same institution as me.

As an aside, it is utterly ignorant to suggest that we do not have significant mortgage fraud in Canada, especially in the overpriced markets of the Lower Mainland and Vancouver Island where I may suggest a vast number of approved mortgages are of the ‘fudge’ type.

1) Mortgage Fraud Type 1 – Income Magnification

a. The most blatant form of income magnification strategies that mortgage brokers use is complete fabrication of employment. I have heard of situations in which the applicant tells the mortgage broker – “I work part time as a clerk at a local store and I make $n per month.” The mortgage broker hears – “I own a small company which I work in 6 days a week and collect a salary of $n x 5 per month.” The mortgage is approved under the false pretense of the income being many times larger and more secure than it really is.

b. The more subtle form of income magnification works like this. Mortgage broker is consulting an applicant who does not qualify for the mortgage he wants. Mortgage broker suggests that he install a suite in the home or have foreign home-stay students to increase his qualifying income by $800 per month. The income does not exist and may never exist but the applicant receives the mortgage based on the inflated ‘expected’ income.

2) Mortgage Fraud Type 2 – Disappearing Debts

a. We live in a debt ridden society and consequently many people struggle just to make the minimum payments on their credit cards and lines of credit. People buy trucks, cars, appliances, and home décor on payment plans which all combined can add up to a significant amount of debt with severe restrictions on monthly cash-flow. Mortgage brokers often ignore debts on mortgage applications or move the debts around to make them appear as if they have been paid off so that the mortgage applicant can be approved under the Gross Debt Service Ratios that the lender uses to determine suitability.

3) Mortgage Fraud Type 3 – Anomalous Assets

a. In the heady days of unprecedented real estate appreciation it seems as if an individual can get through life without ever saving a penny in a RRSP account, company savings plan, or just a plain old savings account. After all can’t we all just count on our houses appreciating into infinity providing us with a life of luxury and leisure? Back in the stodgy world of mortgage lending, it still seems as if lenders would like to see that mortgage applicants have assets to prove that they are reputable with a net worth that is more than zero! Mortgage brokers often overestimate what an “asset” is worth, whether it is a vehicle, RRSP account, personal items or an ownership stake in a company to inflate an applicant’s net worth.

b. A variant of the anomalous asset is the Divine Down-Payment or the down-payment that just appeared out of seemingly thin air. This is typically related to parents “helping” their children with a down-payment on a first home.