Is false income data a symptom of an industry that has run its course?
Could the scandal at Home Capital just be the beginning? The Canadian alternative mortgage company halted its shares after it was revealed that some of its brokers had been falsifying information on the income of mortgage customers.
As the soaring housing markets in Alberta and Saskatchewan go off the boil, a gradual weakening in Canada’s roaring real estate business may reveal more irregularities in the market.
It is a phenomenon we have seen happen so frequently that the uncovering of scandal in a market is often seen as a cause rather that a symptom of a market’s decline. Sometimes they go hand in hand.
On a conference call yesterday Home Capital CEO Gerald Soloway insisted that the problem with its brokers was not an indication of a mortgage fraud crisis across Canada. Home Capital’s delinquencies remain low, and the company says it has stopped doing business with the brokers that investigators had shown to be pretending customers’ income qualified them for mortgages.
Pressure to succeed
It is hard to draw a direct line of cause and effect between the first few scandals in a weakening market and that weakening.
But as markets get into trouble, more and more accounts get shuffled off to the riskier end of the business. Pressure to succeed intensifies. People trying to make a living are more willing to take shortcuts. And it is only as the markets weaken that shortcuts — or outright fraud — are revealed.
There are many examples but the most notorious case is Bernie Madoff, author of what many consider be the biggest swindle in U.S. history. Madoff’s scheme was to accept investors’ money and falsify the income statement on their investment returns. Even as other funds began to do badly, Madoff’s remained strong.
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