Insiders surprised, ‘shocked’ by allegations against mortgage company

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A London mortgage broker says shady mortgage deals that use a so-called gifted down payment – paid back with a second mortgage that is prohibited – occur more often than one might think.

London mortgage broker and vlogger Mark Mitchell spoke out this week after the Financial Services Regulatory Authority of Ontario announced it has started enforcement action against Forest City Funding Inc. and its president William Handsaeme, alleging the company used “false or deceptive information and documents” when dealing in mortgages.

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“I won’t say it’s common, but it happens a lot more often than we see in the media,” Mitchell said. “I get calls quite often where borrowers are looking for something like this. When I say no, they aren’t going to just hang up the phone. They are going to go to the next broker.”

Forest City Funding, located at 1 Commissioners Rd. East in London, brokered 5,739 mortgages in 2022 worth more than $2 billion, the authority said. The company sponsored nearly 350 full-time mortgage brokers and agents.

The authority said Tuesday the brokerage, and Handsaeme, its principal broker, face potential fines of $110,000 following a two-year probe.

The company is alleged to have acted “when it ought to have known that by acting it was being used by a borrower to facilitate dishonesty,” the authority said in a notice of proposal dated Feb. 9, 2024.

Toronto mortgage broker and Angry Mortgage podcaster Ron Butler said the financing Forest City Funding is accused of in five transactions probed by the regulator is “a very old type of mortgage fraud.”

“It’s been around for 25 years,” he said. “We saw more of this back in the day.

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“The majority of mortgage fraud today is income document fraud to be qualified for a bigger mortgage.”

Handsaeme, identified by the authority as sole director of Forest City Funding, is alleged to have caused the company to engage in the conduct the authority says violated the Mortgage Brokerages, Lenders and Administrators Act.

The authority said it proposes to suspend Handsaeme’s mortgage broker licence for one year.

Handsaeme did not respond to requests for comment.

Butler said he was “totally shocked” to hear the accusations against Handsaeme and Forest City Funding following an investigation into five transactions in which Forest City Funding arranged the first mortgage and a company linked to Handsaeme was the lender for the second mortgage.

“I know Bill Handsaeme – he’s rich and very successful,” he said.

Mitchell said the allegations against Forest City Funding are surprising to him as well.

“It’s a big, big outfit and Bill Handsaeme has been in the industry for years,” he said.

Mitchell said the motivation of some borrowers to own a home might be so great they are willing to circumnavigate the system that prohibits taking out second mortgages to pay back a down payment gifted by their parents or another backer.

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“It’s because they want to get into the house so bad and they think they can afford making those payments,” he said. “They think the law and regulations are wrong and they can more than afford it so it’s OK to bypass the proper channels.”

But the bank and insurance companies have debt ratio regulations for a reason, Mitchell said.

“It’s so they have a rough idea of what they can afford before the risk of not being able to pay their mortgage,” he said.

But inevitably something comes along like higher inflation, interest rate hikes or a job loss and then there’s an increased risk of losing a home, he said.

“That’s bad for everybody,” Mitchell said.

In the highly competitive world of mortgage brokerage, an agent may be tempted “to cut corners,” he said.

“Desperation leads to desperate moves,” Mitchell said.

But tracking cases of mortgage broker misconduct is very difficult for the authority to nail down and investigate.

“It’s something that is hard to track,” Mitchell said. “How would you know this is occurring?

The lender doesn’t track where the gift comes from – so there is very few ways to get caught in this type of fraud.”

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The Financial Services Regulatory Authority of Ontario investigated Forest City Funding in 2022 and 2023. The regulator reviewed five transactions in which Forest City Funding arranged the first mortgage and a company called Solidity Group was the lender for the second mortgage.

“In all five of the transactions, (Forest City Funding) knowingly assisted the borrower in obtaining a second mortgage that contravened the terms and conditions of the first mortgage,” the authority said in the notice of proposal.

The terms of the first mortgage prohibited secondary financing, the authority said.

“As (Forest City Funding) arranged the first mortgages, (Forest City Funding) was aware of these terms of the first mortgages,” the authority said.

The company also helped borrowers get second mortgages, the authority said.

“In doing so, (Forest City Funding) knowingly facilitated the borrowers violating the terms of the first mortgages,” the authority said.

In four of the five transactions, the authority said, the second mortgage was used to pay back supposedly “gifted” down payments, a contravention of the terms of the first mortgage commitments.

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“All of the first mortgage commitments contained a requirement that any funds provided for a down payment be gifted and not repayable,” the authority said.

Forest City Funding arranged both the first and second mortgages so it was aware of the terms of the first mortgage, the authority said.

In the four transactions, Forest City Funding “deceptively submitted” a “gift letter” to the first lender saying the funds for the down payments were non-repayable, the authority said.

“Handsaeme even admitted to the authority that the purpose of the second mortgages issued by Solidity Group was to repay family members who provided the short-term funds for a down payment for the first mortgage,” the authority said.

Solidity Group, the lender for the second mortgages in the five transactions reviewed by the authority, funded 71 mortgages with a total value of about $26 million in 2022, the authority said.

Handsaeme is president and one of two directors of Solidity Group, the authority said.

Solidity Group listed fees on disclosure documents for the five second mortgages that included fees for an “insurance premium” and a “tax” on the insurance premium that were in fact additional lender fees, the authority said.

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“The incorrect disclosure to borrowers relating to ‘insurance premiums’ and ‘tax’ caused the annual percentage rate (APR) of the mortgages to be underreported, resulting in an incorrectly disclosed cost of borrowing to the borrower,” the authority said.

In one case, the annual percentage rate disclosed to borrowers was 2.74 per cent while the approximate minimal actual APR was 13.54 per cent, the authority said.

Handsaeme has requested a hearing about the proposal before the financial services tribunal, an independent adjudicative body made up of nine members, the authority said.

The authority has posted the date of the hearing on its website.

HRivers@postmedia.com

@HeatheratLFP

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