Legal Blog

Mortgage Fraud

Mortgage fraud seems to be growing exponentially. Of course, mortgage fraud directly affects financial institutions and, consequently, us.

Two examples of mortgage fraud follow: 

1.   A fraudster forges a transfer from the registered owner to the fraudster. The fraudster takes title in the name of someone whose identity the fraudster has stolen. The fraudster then goes to a bank and, using the purloined identity, obtains a mortgage on the fraudster’s new property. The fraudster uses the correct address of the person whose identity the fraudster has stolen and tells the bank that the fraudster is leasing the property to someone else. The fraudster presents the bank and the bank’s lawyer with newly minted false ID, gets the mortgage funds, and disappears. The bank commences power of sale proceedings and then finds that the “tenants” of the mortgaged property are not tenants at all. They are the true, formerly registered, owners of the property. They know nothing of what transpired until the bank’s lawyers, dealing with the notice of sale, contact them for the first time.  

2.   Husband is away for long periods. This sometimes leads to marital infidelity. However, in this case, wife copes with the long absences by gambling – big time; she therefore has no time for marital infidelity. Of course, there is nothing wrong with gambling, unless you lose. And lose wife does. A gambling crony gives wife a great idea. She has husband give her a power of attorney over property. Since husband is not actually present to do this, she forges his signature. Wife then puts two mortgages on the property that she jointly owns with husband, encumbering the property for an aggregate debt of $356,000. She uses the money to pay her gambling debts. Unfortunately, wife cannot service the mortgages, which go into default, and husband returns to two mortgage actions. Welcome home, honey.

Real Cases 

We are not making up these fact situations; they are real. The first fact situation arose in Toronto-Dominion Bank v. Jaing, a 2003 decision of the Ontario Superior Court of Justice and a case in which we acted. The second arose in Household Realty Corp. v. Liu and Chan and CIBC Mortgages Inc. v. Liu and Chan, two 2005 decisions that the Ontario Court of Appeal decided in one set of reasons for decision.

Jiang    

In the Jiang case, there was no title insurance on the mortgaged property. Accordingly, the dispute involved the innocent homeowners against the innocent bank. The lawyer who had acted for the bank had done nothing wrong. Although he did not have copies of proper ID in his file, the bank had the ID and had the lawyer asked, the fraudster would simply have supplied him with the same fake ID.

Our strategy in this file was to ensure that the bank did not have to throw the defrauded owners on the street, but also to ensure that the bank was paid. Enter the Land Titles Assurance Fund (the “Fund”). The Fund, which is taxpayer funded, exists to compensate people defrauded of their interest in land. However, the Fund is not a pot of insurance; it is a fund of last resort and the applicants must demonstrate that they have done everything in their power to assert their rights and collect against the fraudster, title insurer, or any other persons, including lawyers, who might be negligent or responsible.

We knew that the Fund would never pay the bank had the bank applied for compensation directly. We had seen too many cases in which other banks had tried this route and come up empty. The deputy registrars took the position that if a bank dealt with a forger, the bank got what it deserved: nothing.

Accordingly, we decided to take our chances in court. At that time, the courts were using the doctrine of deferred indefeasibility. Applying this doctrine, the initial fraudulent transfer from the registered homeowners to the fraudster would be a nullity and therefore set aside. However, the subsequent mortgage to the bank from the newly registered owner would be valid. Accordingly, the property would be returned to the owners, but would be subject to the bank’s mortgage. This is exactly what the judge held in the Jaing case. 

The owners then applied to the Fund. The deputy registrar was loath to award compensation because the bank would then be getting through the back door what she would not have granted through the front door. However, she really had no choice. There was no doubt that the owners had lost their interest in their property because of fraud and, if they were not compensated, the bank could have acted to force them either to repay the mortgage or to lose their property. This would have been a public relations disaster for the Fund and, ultimately, the Fund paid the bank everything that was due to it under its mortgage.

Liu and Chan 

The Liu case was slightly different. The real crook was not a third party forger, but one of the joint owners. Accordingly, the sympathy and equities that are engendered for the owners in a third party fraud case were not present.

If the court used the principle of deferred indefeasibility, then the mortgage against the husband’s interest in the property had to be set aside based on the fraud. The husband did not sign the mortgage to the bank; his wife did through the fraudulent power of attorney. However, there was no reason why the mortgage against the wife’s interest in the property had to be set aside.

The court, however, held that the mortgage was valid. Although the court protested far too much that it was not doing this, the court, in effect, adopted the principle of immediate indefeasibility (i.e. if the land register showed a particular owner, that person seemingly signed the mortgage, and the mortgage was registered on the register, then the mortgage was valid). Accordingly, the court held that the mortgagees could enforce their mortgages against both the wife and the husband.

Problems

The Liu decision means that anyone who owns property is at risk. If a fraudster can persuade a bank to give a mortgage on a property that someone else owns, that mortgage is valid. It is no longer a two-step process, as it was under Jiang; it is now a one-step process.

Assume a fraudster steals the identity of the owners and mortgages the land to a bank using that false identity. The bank gets a valid mortgage. This seemingly is great for the bank, but how would the bank employee feel if that employee was the defrauded owner? Of course, this scenario has the same outcome as in the Jiang case, but it allows the fraud to occur even more easily. We suspect that there will be many more applications to the Fund than there were in the past.

However, is the Liu decision that good for banks? Yes, but only if the property is not title insured. In the past, if the mortgage was title insured, the insurers would simply have paid the bank and then tried to get the money back through other means. Now that they can rely upon this case, they can and will tell the bank, “We are not going to pay you anything. The Liu case means that you still have a valid mortgage; so collect the money from the mortgagors.”

This may be easy for the insurers to say, but hard for the bank to do. The bank has the same problem that the TD Bank faced in the Jiang case. It is a public relations problem to dispossess an innocent homeowner. Accordingly, the bank will have to commence its action against the homeowner and ultimately obtain a judgment. Then the bank will have to wait for the homeowner to make application to the Fund and hope that the application is successful. The Jiang case took over three years from the date that we received the file to the date that the bank received its money. The Fund application took over two of those years.

We feel that the Liu decision is bad for homeowners and, once the initial euphoria wears off, bad for financial institutions. The only persons whom it will benefit are the title insurers, who no longer have to pay for fraud.