Can you lose your home as a victim of real estate fraud?
Gail Vaz-Oxlade recently answered a series of questions and raised the issue of whether registering a mortgage against your home as security for a line of credit is sufficient protection against real estate fraud. She briefly alluded to the case law on real estate fraud and how registering a line of credit against your home may be self-serving for the banks. This post builds upon Gail’s comment so all credit is due to her for letting me off the hook of thinking of a new topic.
Title fraud consists of: (i) impostor pretends to be a homeowner; (ii) transfer title to himself/herself; (iii) obtains a mortgage pretending to be the current owner (relying on the fact the financial institution does not conduct its due diligence to run a title search); and (iv) disappears with mortgage funds.
The obvious concern is that the true homeowner has lost title to the home but is now responsible for the mortgage obligation.
Without reciting the jurisprudence on this matter, and to simplify this as much as possible for informational purposes, the law in Ontario for all transfers made after October 19, 2006 works under a legal doctrine known as “deferred indefeasibility (the case law and laws outside Ontario take a similar approach but please refer to appropriate information and/or advice if you live elsewhere).
What this doctrine means in plain English is that the true owner continues to hold title in the property if the fraud is discovered. Thus, section 78(4.1) of the Land Title Act of Ontario states:
Subsection (4) [which refers registration of instruments including transfers] does not apply to a fraudulent instrument that is registered on or after October 19, 2006.
The bank who was duped can seek compensation from the Land Titles Assurance Fund which is set up to compensate losses suffered as a result of real estate fraud (the same is true for the home-owner if they did not catch the fraud).
HOWEVER, the doctrine of deferred indefeasibility further states that if the impostor transfer title to a subsequent party or the property is subject to a power of sale/foreclosure by the bank, the subsequent purchaser acquire an interest in the property which is good against the world (hence, the meaning of the term deferred indefeasibility). Given the subsequent purchaser had no opportunity to avoid the fraud, they, too, are innocent parties in the fraud and should not be punished for their lack of knowledge.
Thus, the Land Titles Act further states:
Nothing in subsection (4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument described in that subsection, including instruments registered subsequent to such a fraudulent instrument.
The practical implication of the doctrine of deferred indefeasibility is: (a) any homeowner who discovers the fraud early will fall within the “right” side of the doctrine since any transaction will be undone; and (b) the burden of the fraud is de facto on the bank as mortgagee since they had the best opportunity to stop the fraud at the initial transfer title and/or mortgage transaction.
Thus, to get back to Gail’s original comment, the bank’s resort to not falling on the wrong side of the doctrine of deferred indefeasibility is either: (a) requiring lawyers to undertake a large amount of due diligence for every home transfer and/or mortgage registration; or (b) trying to encumber the title by registering security in the form of a mortgage.
The practicality of option (a) is that real estate lawyers are engaged in a race to the bottom in fees due to client price sensitivity and this measure only works for new home purchases. Option (b) is limited to the extent that a fraudster can obtain a HELOC by identity theft in much the same way as it obtains title and a mortgage fraudulently.
A prudent approach may be to obtain title insurance with riders which specifically address real estate fraud in addition to encumbering title (yes, title insurance is not insurance you necessarily have to obtain when you purchase a home; it can be obtained at any time). Registering a mortgage against title helps but, as Gail points out, creates another issue if the mortgage gives you access to funds and you cannot control your spending.
If you are concerned you may be subject to real estate fraud, please do seek professional legal advice. If you are interested in title insurance, please speak to a lawyer or call the title insurance companies themselves for information and quote.