When Susan Lawrence went to the bank to arrange a mortgage for a new house she purchased and closed on in late 2005, she was told she no longer owned the house she was living in. Her first reaction was disbelief.
"I thought it was a joke or a clerical error," says Lawrence, who lives in Toronto. "And two weeks later, the bank called me and said, 'Sit down. You've been a victim of mortgage fraud.' And I said, 'what the heck is that?'"
Lawrence didn't have title insurance and was told she was responsible for paying back the fraudulent mortgage - close to $300,000 - which the fraudster obtained by faking her identity, paying off a home equity line of credit and taking out a new mortgage on the home. She decided to fight back. After a long search for a lawyer - she said many didn't understand the complexity of her case - she made it to court.
"The whole reason why the onus was on me to pay was because there was a precedent-setting court case the year before mine," she explains. "The government workers and most lawyers I spoke to were not in agreement with that case, so I think that's why mine was fast-tracked through the courts."
But despite the attention surrounding it, Lawrence's case came back with the same disappointing result - she was still responsible for paying back the mortgage to the lender. So she headed to appeals court, and two years after she had found out she was a victim of title fraud, she won her case. The decision prompted a change in Ontario law so that lenders are responsible for swallowing the losses from mortgage fraud (as long as the homeowner can prove their case, often in court). A recent title fraud case in B.C. (the Oehlerking case) resulted in a similar outcome.
Lawrence's high publicity legal battle proves it wasn't that long ago that mortgage fraud was the type of crime that flew largely under the public's radar, especially for people who had been in their homes for a long period of time and weren't required (or recommended) to buy title insurance on their properties.
For new homebuyers, however, title insurance has become a standard - in fact, many lawyers add an owner's policy directly into a legal fee for home-related transactions. Title insurers also offer existing homeowner's coverage for those who didn't buy title insurance when they purchased their property.
"There are very few lawyers who would close a deal without title insurance these days," says Michael Maguire, a broker with Mortgage Intelligence in London, Ont. "The lawyers like it because it limits their liability and because it simplifies the legal process."
As a standard, lenders are also purchasing title insurance policies as fraud protection, especially because these companies are no longer protected by the legal system and because fraud is still a relatively common occurrence. For instance, almost a quarter of total claims paid by the insurance company First Canadian Title in 2008 were related to title fraud, an increase from 19 per cent the previous year.
"Mortgage fraud is an insider's crime," says Susan Leslie, vice-president of claims and underwriting at First Canadian Title. "These people really know how real estate transactions and land registry systems work."
Title insurance 101
Title refers to the legal ownership of a property, which is registered in the government's land registration system when home ownership is obtained. Title insurance was first introduced in Canada as a replacement for an up-to-date land survey and has gained popularity, particularly in the past few years, because it protects both homeowners and lenders from any loss or damage related to fraud and other title-related issues like tax and public utilities arrears (from the previous owner) and encroachment disputes.
There are three types of residential policies available through title insurance companies: policies for new homeowners, existing homeowners and lenders. The homeowner policy and the lender policy (which can also be called a loan policy) are packaged together because the owner's policy - which lasts as long as someone owns a property - protects the actual title and any liens against it while the loan policy safeguards the mortgage.
The three largest title insurance companies in Canada - First Canadian Title, Stewart Title and Title Plus - all provide these bundled policies at one-time premiums ranging from approximately $150 to $350 (for properties up to $500,000). Premiums depend on the location (province), price and type of property and if it is a new home or resale.
Title fraud trends
Although there is more awareness of title fraud today due to coverage of high-profile cases like Susan Lawrence's, it is still a common occurrence, which is why title insurance companies have implemented systems and teams to help weed out title insurance requests that could be tied to fraud.
For example, First Canadian Title screens every order that comes through using a series of basic questions. If they notice any red flags - including lots of activity on the title, transfers of ownership, multiple mortgages or discharged mortgages - they dig deeper to find out if they have reason to be suspicious. This can mean calling the real estate agent to confirm the purchase transaction, independently verifying contact information and looking at the reasons behind using a power of attorney to transfer title.
Leslie notes that some of the types of properties that are more prone to title fraud include properties that are not owner-occupied. Tenants can even be the people trying to take out a fraudulent mortgage.
"We've found properties that are tenanted seem to be more vulnerable because the owner is more removed from the property and can't always pay close attention," says Leslie.
Sandra Thwaites, vice-president of claims and compliance at Stewart Title Guaranty Company, says she sees a greater occurrence of mortgage fraud on properties that are mortgage-free because it can be easier for fraudsters to take out new mortgages when they don't have to discharge any existing ones.
She has also seen fraud trends in commercial mortgages - sometimes when an individual is impersonating a corporation - and in private lending situations. This often means there is a small extra title insurance charge (or a different premium) if a borrower is going through a private lender.
"Institutional lenders have been tightening up their underwriting requirements and, as a result, people who are intent on committing fraud are finding it more difficult to do so," Thwaites says. "Private lenders often have different levels of due diligence and it may be easier to de-fraud them rather than an institutional lender."
With increasingly complex fraud strategies and schemes gaining popularity, it's important to review client information closely and consult a lender if a deal doesn't appear legitimate. It's also a good idea to briefly explain title insurance to clients, particularly existing homeowners' policies.
"With title insurance, your legal costs are covered if you're a victim of fraud - that's what cost me so much money," says Susan Lawrence, estimating her entire legal process set her back more than $50,000.
Tips for brokers
Although mortgage brokers are not as involved in the process of helping a client obtain title insurance as lawyers and lenders, they can still be an important part of the process of identifying fraudsters and alerting lenders to suspicious borrowers.
"Brokers need to be aware that fraud can occur and they need to have their antenna up for things that seem odd or suspicious, like if age seems off from the person's ID or if the amount of income doesn't match up with other life experiences," says Thwaites.
Some other red flags include someone who wants funds in a hurry and is impatient for a transaction to close quickly without giving any legitimate reason why. Also, if a property is mortgage-free and someone is looking to put a large mortgage on it, a broker should look further into why a client wants the loan.
"There are legitimate reasons why people would be taking out a mortgage on a mortgage free property, but generally - certainly on residential properties - when someone has paid off their mortgage, that goal is not to refinance, so we need to have a skepticism as to why they're doing that," Thwaites explains.
Leslie offers similar tips for brokers, including being suspicious of clients who put pressure on them to do a deal in a short amount of time. She also recommends looking closely at a client's financial information to make sure the full employment picture makes sense and becoming aware of safety mechanisms built into ID, such as the security codes on new Ontario driver's licences.
Maguire says that while he has never come across a fraudulent mortgage transaction during his time in the industry, he thinks more brokers are aware of it and are making an effort to prevent shady deals from happening.
"You don't want to be caught in a deal where someone is trying to put bad paper onto you because lenders are certainly more aware of it, but I think there are a lot of brokers that are trying to uphold a higher standard as well and become more professional," he says. "They're just not willing to get involved in things that may appear questionable - and if we have that standard, that will start helping the whole industry."