To cash out significant money from the bank all one needs is a buyer claiming a house is worth more than the last sale in a neighborhood. The bank is ready and willing with cash. Then you turn around and three months later sell it again (inside your ring of associates) for even more money. Why is the house worth any of these sales amounts? Well, it isn't, really. In these cases it's not an arms-length transaction, but these transactions turn out to be indistinguishable from one inspired by raging house hormones. (In California, real estate agents sold properties within their own offices to inflate local prices and to generate cash flow.) How does the bank tell the difference? Well, turns out, they can't. And moral hazard helps make this sort of fraud a cakewalk. In the U.S. the moral hazard was securitization; Wall Street was screaming for any paper they could securitize and they paid cash without verifying a thing. In Canada it's partly securitizers (in the last three years), but mostly it's CMHC.
Defendants in massive mortgage lawsuit blame BMO for letting fraud happen
Hundreds of Albertans stand accused by BMO of being tied to 14 interconnected groups that allegedly inflated the value of homes and recruited "straw buyers" to assume liability for mortgages in exchange for payments between $3,000 and $8,000.
"The plaintiff was eager to loan money in a heated real estate market. As high ratio mortgage loans were fully insured, the plaintiff took no care whatsoever in approving loans or supervising those who had the authority to approve mortgage loans," reads a joint statement of defence submitted by Suneet Sharma, Rajesh Sharma, Anjna Sharma and several numbered companies.The first is from the accusations in the suit. The second is from the defendants statement of defense. Neither have been verified, nor have charges been filed, but notice how they form perfectly matching puzzle pieces.
"The plaintiff was wilfully blind in respect of the following: the fact that mortgage applicants were overstating the value of their assets; the fact that applicants were overstating their income; the fact that applicants were not intending to live in the properties being purchased."
"Until then, the plaintiff's employees were praised for their high volume of mortgage loans," it reads. "The plaintiff knowingly participated in a conspiracy or scheme to make as much money as possible in a rising real estate market."Plus ça change, plus c’est la même chose, which I'll translate as: Welcome to the next bubble level, Canada.