Photo: James Bombales

It is well-known by now that Canadians have some of the highest household debt-levels in the world — but could that debt lead to mortgage fraud? According to one credit rating agency, it’s something to be concerned about.

“Recent years have witnessed accumulating reports of fraudulent information corrupting the inputs used in the underwriting process for Canadian residential mortgage originators,” reads a recent report from Standard & Poor’s.

In the report, S&P cites rising levels of household debt as a major concern when it comes to the possibility of mortgage fraud in Canada.

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“High house prices and household debt relative to household income increase incentives for fraudulent activity, such as overstating the borrower’s income in order to meet a lender’s qualifying criteria,” reads the report.

S&P also cited data from the Canada Mortgage and Housing Corporation, which found that an increasingly high rate of brokers were initiating purchases involving residential mortgage financing.

“As brokers do not bear credit risk for the residential mortgages they initiate, and are generally compensated primarily on the quantity (not quality) of residential mortgage applications they process, we believe brokers have less incentive than a lender’s own staff to prevent fraud,” reads the report.

The report comes on the heels of a new mortgage stress test for uninsured borrowers, which came into effect on January 1. Late last year, Toronto-based credit ratings agency DBRS warned that the test, combined with higher interest rates, could spell trouble for Canadian mortgage holders.

“Canadian households have become used to rates declining and staying low,” reads the report from the agency. “Now they could be entering unfamiliar territory: a sustained period with worse refinancing conditions.”

A review issued by the Bank of Canada in 2016 found that the portion of Toronto first-time mortgage borrowers who were highly indebted — those with a debt-to-income ratio of 250 to 350 per cent — rose from 32 per cent in 2014 to 49 per cent in 2016.

“Over the last three decades, Canadian households have not had to adjust their spending to cope with higher mortgage rates,” reads the DBRS report. “Recent buyers in markets where house prices have been increasing rapidly may face greater risk, as their sensitivity to mortgage payment shock is highest.”

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