Yes — that got cut off. Here is the complete long-form version. I’m also being careful to frame the information about banks using AI to retroactively review mortgages as what you’re hearing from banking contacts, rather than presenting it as a publicly confirmed industry-wide program.

Could AI Uncover Mortgage Fraud Years After a Loan Was Approved?

For years, there have been stories throughout the Canadian real estate industry about mortgage applications containing inflated incomes, altered tax documents or other questionable information used to help buyers qualify for loans they otherwise couldn't obtain.Most homeowners probably assume that once a mortgage has been approved, funded and payments have been made for several years, whatever happened during the original application is ancient history.That may not necessarily be the case.Based on conversations I've had with contacts within Canada's major banks, I'm hearing that lenders are beginning to explore or implement new technology, including artificial intelligence, to review previously funded mortgage applications for potential signs of fraud.To be very clear, this information comes from conversations I've had with people working within the banking industry. I have not seen a public announcement from Canada's major banks confirming a widespread retroactive review of every mortgage they've funded.But if what I'm hearing is indicative of a broader trend, it raises some very interesting questions.What happens if technology available today can identify something in a mortgage application that wasn't caught five or even seven years ago?And what happens when that mortgage eventually comes up for renewal?

Mortgage Fraud Isn't Necessarily New

Mortgage fraud certainly didn't begin with artificial intelligence.During the enormous real estate run-up leading into 2022, buyers were competing for increasingly expensive properties while lenders still had to determine whether those borrowers could actually afford the mortgages they were requesting.There were also situations where applicants may have had difficulty documenting sufficient income through traditional means.That's where problems can arise.Income documents such as T4s, Notices of Assessment and other financial records can potentially be altered or misrepresented to make a borrower appear more financially qualified than they actually are.In some cases, the borrower may knowingly participate.Someone might understand that they don't qualify for a $1.2 million mortgage and deliberately seek out someone willing to manipulate the application.But I don't believe that's necessarily the only way this happened.

Some Borrowers May Not Have Known What Was Happening

One of the more concerning possibilities is that some borrowers may have had very little understanding of what was being submitted on their behalf.Imagine someone wants to buy a $1.5 million home.They have the required down payment, but they aren't sure whether their income will qualify them for the remaining mortgage.They approach someone and essentially say, "This is the house I want to buy. Can you get me approved?"They're told not to worry.The mortgage gets approved.The property completes.And from the buyer's perspective, everything appears legitimate.Did every borrower carefully review every document submitted as part of that application?Probably not.That doesn't mean the borrower had no responsibility for the information being provided to the lender. But it does create a distinction between someone deliberately falsifying their own documents and someone relying on a professional who may have submitted inaccurate information without the borrower fully understanding what was happening.That's one of the reasons this issue can become so complicated.

Technology Has Changed Dramatically

Now we get to the part that I find particularly interesting.The technology available to lenders today is significantly more sophisticated than it was five or six years ago.Banks retain substantial records relating to mortgage applications, including the documentation used to support those applications.According to what I'm hearing from contacts within the banking industry, artificial intelligence may increasingly be used to review those historical documents and identify inconsistencies or signs that something wasn't legitimate.Think about what that could potentially mean.A mortgage application that appeared normal to a human reviewer several years ago might contain inconsistencies that modern software can identify much more easily.Documents could potentially be compared.Patterns could potentially be detected.And if a particular mortgage professional was responsible for a large number of questionable applications, technology could potentially make it easier to identify similarities throughout that person's book of business.Again, I'm not suggesting that every Canadian mortgage is currently being run through some giant AI fraud detector.But the possibility of lenders using better technology to review old applications means borrowers shouldn't necessarily assume that a funded mortgage can never be questioned again.

The Mortgage Professional May Be Part of the Investigation

Another interesting part of what I'm hearing involves the people who originally arranged these mortgages.In Canada, borrowers can obtain financing through different channels, including mortgage brokers and mortgage specialists working directly with financial institutions.If a lender discovers a pattern of problematic applications associated with one individual, it would make sense that the lender would begin looking more closely at other mortgages arranged through that person.And that's where innocent borrowers could potentially become caught up in the issue.According to conversations I've had with banking contacts, there are situations where the entire book of business associated with a particular mortgage professional may come under additional scrutiny.That doesn't automatically mean every mortgage they arranged was fraudulent.It means the lender may have a reason to take a closer look.

What Happens If Your Mortgage Was Legitimate?

This is where things could become particularly frustrating.Imagine you legitimately qualified for your mortgage.You provided accurate documents.You made your payments.You did everything you were supposed to do.But the person who arranged your mortgage was later associated with questionable applications involving other borrowers.Could the lender decide that it no longer wants to continue that relationship when your mortgage term expires?Based on what I'm hearing from banking contacts, that possibility shouldn't necessarily be dismissed.I've been told of situations where borrowers associated with a particular mortgage professional may be required to take their mortgage elsewhere when their existing term expires.That doesn't necessarily mean those borrowers committed fraud.It could simply mean the lender no longer wants certain loans associated with that book of business remaining on its books.If that happens, a borrower could find themselves unexpectedly shopping for a new lender at renewal.

Why Could That Become a Problem?

If your finances are strong and your property has substantial equity, moving your mortgage to another lender may simply be an inconvenience.But consider someone who bought near the top of the market.Their home may now be worth substantially less than when they purchased it.Their financial circumstances may have changed.Their income may be different.Their debts may have increased.And mortgage qualification standards today may not produce the same result they received several years ago.If their existing lender is willing to renew the mortgage, that borrower may be able to simply continue making payments.But if they're forced to find an entirely new lender, they may have to qualify again under that lender's requirements.That's potentially a much bigger problem.

Falling Home Prices Make This More Complicated

This issue also arrives at a particularly difficult time for parts of the BC real estate market.Across the Fraser Valley, we've already seen significant declines from the peak of the market.That means some borrowers who purchased during the strongest years of the market don't have the same equity cushion they might have expected.At the same time, some homeowners are renewing mortgages that originated during a period of extremely low interest rates.Put those factors together and you can see why lenders would be paying very close attention to the quality of the mortgages on their books.A borrower who qualified legitimately and continues comfortably making payments is one thing.A mortgage that may have been approved using questionable information and is now showing signs of financial distress is something very different.

Could This Contribute to More Foreclosures?

This is the part I'm watching closely.We've already seen a substantial increase in court-ordered sales and foreclosures in British Columbia.If lenders begin identifying additional questionable mortgages from previous years, it could potentially add another layer of stress.That doesn't mean discovering an irregularity automatically leads to foreclosure.Far from it.Every situation is different, and there are numerous steps between identifying a potential problem and a property ultimately being sold through the courts.But imagine a homeowner approaching renewal who discovers that their current lender doesn't want to renew their mortgage.If they can't qualify elsewhere and they don't have enough equity or financial resources to solve the problem, selling the property may become necessary.If they can't sell or otherwise resolve the debt, the situation can become much more serious.That's why this matters beyond the individual borrower.

A Funded Mortgage Isn't Necessarily the End of the Story

For years, the assumption may have been that once a questionable mortgage funded, the borrower was essentially in the clear as long as they continued making the payments.Technology could change that.Artificial intelligence and increasingly sophisticated fraud-detection systems give financial institutions tools they simply didn't have during previous real estate cycles.And those tools don't necessarily have to be used only on new applications.Historical records still exist.That creates the possibility that lenders can look backwards as well as forwards.

What Should Homeowners Take From This?

For the overwhelming majority of homeowners who provided accurate information and legitimately qualified for their mortgages, this shouldn't be a reason to panic.But it does reinforce the importance of understanding what's being submitted on your behalf when you apply for financing.Don't simply assume that because someone tells you they can "get the mortgage done," everything happening behind the scenes is legitimate.Review your documents.Ask questions.Understand the income being reported.Understand the debts being disclosed.And make sure the information being provided to the lender accurately reflects your financial situation.Ultimately, you're the person taking on the mortgage.

This Could Be Another Consequence of the Real Estate Boom

The Canadian real estate boom created enormous pressure throughout the system.Buyers were desperate to get into the market.Prices were rising rapidly.Financing had to come together quickly.And there was a widespread belief that real estate prices would continue going up.Now we're living through the other side of that cycle.Prices have fallen significantly in many BC markets. Foreclosures and court-ordered sales have increased. Borrowers who obtained extremely low mortgage rates several years ago are reaching renewal.At the same time, technology has become dramatically better at identifying irregularities.If banks begin using those tools to look backwards at mortgages approved during the boom, we may discover that some of the financing behind those purchases wasn't nearly as strong as everyone assumed at the time.And perhaps the most interesting part is that the consequences may not appear until years after the mortgage originally funded.For now, much of what I'm hearing about these retroactive reviews comes through conversations with people inside the banking industry rather than public announcements from the banks themselves.But it's something I'll be watching closely, particularly as more mortgages come up for renewal and BC continues dealing with an elevated number of court-ordered sales.Because if technology can uncover questionable mortgages years after they were approved, the real fallout from the previous real estate boom may not be finished yet.Written by:
Steve Karrasch PREC
Karrasch Real Properties Team
Macdonald Realty