When it comes to avoiding real estate fraud, it is important for third-party lenders to make the necessary inquiries to determine that there are no prior undisclosed mortgages, Toronto real estate lawyer Lisa Laredo tells Law Times.
The Ontario Superior Court of Justice recently explored this issue in CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, which focused on two individuals who secured a mortgage for more than $280,800 on a home in Brampton, Ont. from Computershare Trust, Law Times reports.
Although the mortgage was later discharged, the pair continued making the monthly payments and then sought financing from two other institutions, ultimately securing three different mortgages on the same property.
The financial institutions discovered the fraud and took the issue to court, but the individuals filed for bankruptcy and vacated the property. The house was subsequently sold for an amount that fell far short of the money owed to the lenders. As such, the lenders disputed over who had first ranking charge against the property.
The Ontario Superior Court of Justice found that Computershare was the first to issue a mortgage and CIBC, which provided a mortgage after the first was discharged, should have gone beyond the title to ask additional questions.
As Laredo, principal of Laredo Law, says in the article, because the fraudsters kept paying the Computershare mortgage for years after it had been discharged, there were no obvious signs of the scam. Any innocent parties who became involved after the discharge ended up being defrauded, she explains.
It is up to third-party lenders providing a mortgage to determine whether a borrower can take on a new mortgage and that there are no prior undisclosed mortgages, she says.
“I would suggest any transactions with the title within the past six months must be scrutinized and questioned so the purchaser can have some comfort that the vendor is entitled to convey what he is purporting to do,” Laredo tells Law Times.
“The inquiry need only go back to the registered owner and his dealings with the property. There is no need to go back two or more prior owners. If the registered owner is acting in a bona fide manner, the fact that he innocently received title from a fraudster will not prevent him from conveying good and marketable title to a subsequent purchaser or mortgagee,” she adds.
Laredo also suggests that a mortgage lender needs to ask the right questions before approving a loan, and a solicitor acting for a lender needs to make similar inquiries as if acting for the purchaser.
Because it is not practical for solicitors to conduct a detailed investigation, some fraud could initially go undetected, says the article. As such, title insurance plays a role to insure against the consequences of successful fraud.