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The first kind of real estate fraud is perhaps the most disturbing; stripped of its essence, it is simple. But its execution is so sophisticated that often even the highest level of diligence on the part of a lawyer would not detect that something was amiss.

The scenario
Mr. and Mrs. Smith buy a new home in an upscale subdivision in Newmarket for $500,000 in the summer of 2000. They give a mortgage to the Bank for $350,000. Their property is registered in the Land Titles system. They live in the property.

Their home has been targeted by the fraudster, perhaps with the help of someone in a real estate broker's office who knows when properties get bought and sold. In December, 2000, the fraudster, presumably with some assistance from a well-trained law clerk or other paralegal, does the following.

First, the fraudster prepares, and then registers a Deed from Mr. and Mrs. Smith to Mr. X and declares that the purchase price is $550,000. He pays Land Transfer Tax on $550,000. Mr. X is now the registered owner of the property. He has had Mr. and Mrs. Smiths' signatures forged, he has signed a Land Transfer Tax affidavit which appears to have been sworn, he names a law firm as preparer of the Transfer and he names a new law firm as the lawyers who prepared the Land Transfer Tax affidavit and who will appear to have acted for him on the purchase.

A week later, he prepares a discharge of mortgage from the Bank using phony names as signing officers and naming either the Bank's mortgage processing centre or a law firm as the preparer of the document. He may even include the name or initials of a lawyer in the law firm on the document. He registers the discharge.

Mr. X is now the registered owner of the property free and clear of encumbrances. (In some cases, the fraudster uses his own name as transferee. In other cases, Mr. X is a fictitious name or the name of some other innocent person).

The fraudster then goes to a mortgage broker or a bank and applies for a loan of $275,000 against this property. The fraudster will indicate that he buys and sells real estate frequently, buys for cash and then obtains his financing later, and is willing to pay a sizeable mortgage brokerage or placement fee if a mortgage can be arranged easily and quickly.

The broker finds a lender who is more than happy to lend on 50 per cent of the value of this relatively new house. Mr. X may also tell the broker or lender that the property has just been rented out to tenants and he doesn't want the tenants disturbed by someone doing an interior inspection or appraisal of the property. Given the loan-to-value ratio, the lender or broker will decide that a drive-by appraisal is sufficient. Forged documents, including income references from an employer, are provided, or alternatively Mr. X indicates that he is self-employed so that there is no employment record. Any sense of an inflexible lender will move the fraudster to some other lender.

The lender appoints the usual lawyer it uses for these types of deals to do the legal work on the mortgage loan. The lender sends out its typical commitment and letter of instructions. The fraudster, who is now the borrower, indicates that he wants the deal done quickly and is most flexible about who does the legal work for the lender. In order to expedite the deal, he is content that whoever the lender wants can do the deal.

The lawyer receives the instructions and searches title. The lawyer discovers that Mr. X is the registered owner, free and clear and that he bought the property a few days or weeks ago. If the Land Titles system hasn't fully recorded the deed to Mr. X and the mortgage discharge yet, the lawyer will review them to see that they are satisfactory. They will be flawless documents. He searches realty taxes and discovers that the taxes are up to date but of course the tax certificate indicates Mr. and Mrs. Smith as owner. That is simply explained since Mr. X recently bought the property and the records at the tax office have not been changed. The lawyer searches executions and they too are clear.

The lawyer may ask the borrower whether he has a survey of the property. Most likely he does not. The lawyer might think about calling the lawyer who appears to have acted on Mr. X's purchase recently, but the borrower will instruct him not to do so, explaining he and the lawyer had a falling out or he doesn't want his purchase lawyer contacted. It may well be that the lender will waive the survey since this is a relatively new house and what kind of problems could there be in any event? There can't be much risk given the loan-to-value ratio. Possibly, the lawyer will get title insurance to insure over the absence of a survey. Some title insurers don't require a survey on whole lots on a plan of subdivision.

The lawyer prepares the usual mortgage documents. Of course, Mr. X is anxious to get the deal done and has already pressed the broker and the lawyer to expedite matters because he "needs the money for another deal" or "is going out of town."

The borrower attends at the lawyer's office to sign documents. The lawyer asks for and sees his driver's licence or other photo identification as proof of identity. Sure enough, there is Mr. X's picture on the driver's licence. The address on the driver's licence is not the property address, which makes sense; the borrower has indicated that it is an investment property. The birth date on the driver's licence matches the birth date of Mr. X on his deed.

Mr. X may also advise the lawyer that he deals frequently in real estate and there may be more deals to follow. Mr. X receives his $275,000 loan from which the brokerage fee is paid to the broker, the lawyer deducts his fees from the advance and Mr. X receives his advance. Mr. X then deposits $20,000 into a bank account to cover the postdated cheques that he has written to cover the mortgage payments that will be made on this mortgage for the next few months. The balance of the funds is given directly to Mr. X, or is directed by Mr. X to a foreign exchange office, converted into U.S. dollars and moved offshore.

In the meantime, in each case a lawyer has certified to the new lender that it has a first mortgage on the property. The bank, whose mortgage is discharged from title, is still receiving payments from Mr. and Mrs. Smith who live in the house but who do not have title. When the new mortgage goes into default, and demand is made on the occupants, everyone starts scratching their heads wondering who has what and who is to blame.

The outcome
This scenario, with some variations, has been discovered in the greater Toronto area, to titles in Toronto, Peel and York Region, more than 10 times to the best of our knowledge. In one situation, Mr. X did this five more times over a five-month period on different properties. After about six or seven months, the money in the bank account ran out and the five new mortgages were in default. Mr. X had stolen $1.5 million. In another case, $850,000 was stolen on two mortgages over three months. In yet another case, $700,000 was stolen on two mortgages in two weeks.

This fraud can happen anywhere. There is little or nothing that would make this loan transaction suspicious in the ordinary course. Presumably, the lender has already checked out the borrower. Even then, Mr. X is the registered owner of the property under Land Titles; he produced acceptable photo identification. What circumstances would there have to be for the lawyer to blow the whistle on a straight forward residential mortgage loan?

Unfortunately, real estate lawyers seem to be necessary pawns in the fraud because they act for the new lenders and they certify title and the validity of the mortgages that they register. The legal issues that arise, not only in this type of fraud but in any fraud, forgery and imposter cases, including such questions as who is entitled to relief and what is the role of the lawyer, are complicated.

Lawyers as pawns: The warning signs

In this type of scam, the fraudster seems to understand the real estate business and the way lawyers, mortgage brokers and lenders work. He knows that:

1. lenders will happily lend on 50 per cent of value;
2. brokers will happily fund mortgage money on this basis;
3. lenders will probably waive detailed appraisals on this basis;
4. lawyers will rely on the Land Titles system to assume that there is good title;
5. lawyers ask for photo identification;
6. everyone is prepared to expedite transactions where premium fees are paid;
7. everyone is prepared to expedite transactions where the client promises more deals in the future.

The lawyer seems to have acted reasonably. He has followed the acceptable standard of searching title, relying on the title register and obtaining identification. Could the lawyer have done anything to prevent the fraud? The experience, from a review of a number of these frauds, reveals some similarities but they are not exclusive to these frauds. Many of our most reliable and legitimate clients exhibit similar conduct. Surely, our job is not to be a detective, especially when presumably, the lender has already approved the borrower for a loan.

Nonetheless, some recurring conduct includes:

1. the borrower very recently purchased the property on an all-cash basis and is now borrowing against the property;
2. the borrower has his deed but no other purchase documents. He has no survey. (In one fraud, the fraudster even had a survey);
3. the borrower's lawyer who acted on the purchase is not acting on the loan or acting for the borrower;
4. the borrower instructs you not to contact the lawyer who acted on his recent purchase;
5. the borrower is in a very big hurry. The turn-around time on the deal is one to three days;
6. the borrower may not have placed fire insurance on his house;
7. the mortgage brokerage fee seems generous on what should be a simple residential loan;
8. part of the mortgage advance is directed to third parties, including foreign exchange companies or off-shore recipients;
9. the borrower indicates that he is quite active in real estate investing and does deals like this frequently; more deals may come your way.

• The new face of real estate fraud
• Diligence no match for determined fraudsters
• Lawyers as pawns: The warning signs
• The Land Titles Register: Can it be relied on?
• FLIP: When all that glitters is not gold
• The warning signs of flip frauds
• The shapes fraud can take
• How to identify a fraudster