by Neil Sharma 2018 MBN

According to a study of Canada Mortgage and Housing Corporation-insured mortgages, Canadian house hunters aren’t being truthful on their mortgage applications—and brokers are not to blame.

CMHC determined prospective homebuyers bloat their reported incomes far more often than they do with the Canada Revenue Agency. According to the Financial Post’s Haider Moranis Bulletin, it’s likely because mortgage fraud hasn’t shaken the foundation of the country’s financial system like it has south of the border, which spurred inquiries. Moreover, it is not clear how much fraudulent statements affect mortgage default rates.

The CMHC report by Kiana Basiri and Babak Mahmoudi juxtaposed potential income misstatements from first-time homebuyers with incomes reported to the CRA between 2004 and 2014 and concluded markets with affordability challenges had higher misstatements. Also perhaps not surprising, the report noted a correlation between higher default rates and income misstatements.

But there was insufficient evidence that mortgage brokers are responsible for income exageration. While it’s sometimes believed that brokers shirk their duties by ignoring borrowers’ Beacon scores, the study concluded that income misstatements are not higher among mortgages originated by brokers.

First-time homebuyers, equity-poor as they are, usually pay for down payments through a confluence of their savings, loans and gifts—but they struggle to do so. Because commercial banks demand 20% down while CMHC insures mortgages with as little as 5% down, the latter is a popular option. However, where the incidents of misstated incomes rose, so too did arrears.

Canada-wide, only 11,520, or 0.24%, of all mortgages were in arrears. The Canadian Bankers Association notes that’s a good thing, because during the apex of the American housing crisis, foreclosures hit 2.2%.
Curiously, as of February 2018, Saskatchewan—at 0.78%—leads all provinces in arrears, while Ontario and British Columbia have mortgage arrear rates of 0.1% and 0.15%, respectively. Provinces without pronounced housing affordability problems had the highest arrears rate.

Nevertheless, the study highlighted two areas of positivity: The chasm between the incomes reported to CMHC and the CRA is not very wide, and when housing prices escalated, falsified income statements did not.