Francis N.J. Taman and Ksena J. Court
It has been a complaint of many members of the foreclosure bar that mortgage fraud rarely seems to get the level of attention from the police that it deserves in terms of the losses it generates. Prosecutions are rare, convictions even rarer. Indeed, we are only aware of two. The most recent conviction was in Red Deer.
In MacMullin, the accused was charged with forty one counts of fraud. While the trial judge did not convict MacMullin of every count he was charged with, the Justice noted “I stress that even in those cases where I do not find him guilty that is only because the probability of his guilt or the suspicion of his guilt did not coalesce into proof beyond a reasonable doubt. I have no doubt he was the ringleader and a party to these frauds, either as a direct participant, or as aider, and abettor.
Of greatest interest to lenders, however, is the Justice’s analysis of the various schemes. Indeed, the case highlights a number of red flags that lenders, mortgage brokers and other real estate professionals need to keep an eye out for. Justice Germain noted that, despite the number of transactions involved, the misleading statements and deceptive tactics involved really fell into 3 categories:
- Manipulation of the Real Estate Purchase Contract;
- Manipulation of background information in the Mortgage Application; and
- Incorrect statements regarding the borrower’s principal residence.
Manipulation of Real Estate Purchase Contract
MacMullin and his associates used both standard realtor’s contracts and what the Justice described as “self-help press” contracts. The first tactic, quite familiar to lenders, was the sale at an inflated price. The defendants found individuals who were willing to sell their property which was priced at a level which they suspected was less than the amount than might be accepted by lenders and mortgage insurers as the value of the property. MacMillan or his associate would agree to pay the full asking price but would have the sales contract written up for a higher value. A straw buyer would certify that they would be residing in the house to facilitate them arranging a high ratio mortgage with a 95% loan to value ratio. This allowed them not just to put no money down, but in some instances to actually take some additional cash out of the property.
A second methodology was to arrange a fictional sale to permit a homeowner to take all of the equity out of their house. A straw buyer was arranged and the sale price again was set to allow all the equity to be taken out of the house. The idea was that the original owners would remain the equitable owners of the property. Although not mentioned in the analysis, presumably at some time down the road, the property would be transferred back to the original owners. MacMullin would get a fee or a portion of the equity. 
The majority of the deals done by MacMullin involved straw buyers. In some instances, MacMullin would arrange for a straw buyer to obtain a mortgage and purchase a property owned by MacMullin or one of his associates at a price set by MacMullin. MacMullin would receive all of the mortgage proceeds and would retain beneficial ownership of the property.
MacMullin would also enter into deals with third party vendors to purchase their property. He would then arrange for a straw buyer to purchase the same property from him at a higher price. In some instances, MacMullin would take title to the property and then transfer it to the straw buyer. In others, MacMullin would have the transfer from the third party vendor put in the name of the straw buyer, a process commonly called a skip transfer.
Normally, in these straw buyer deals, the straw buyer is paid a fee. That is the incentive for them to allow their name and good credit to be used in the scheme. In addition, they are generally promised that the organizers of the straw man deal will provide them with the mortgage payments until the property is transferred out of the name of the straw buyer. Interestingly, in many instances, MacMullin never paid the promised fee nor did he provide the money for the mortgage payments.
In some instances, the straw buyer already owned a home. In order to be able to maximize the amount of the loan, MacMullin would create an imaginary sale of the straw buyer’s existing home. A real estate purchase contract would be signed documenting the imaginary sale. The sale also explained the source of the down payment of the “new house”, which simplified the approval process.
A similar approach was used to recycle willing straw buyers. MacMullin would use his company or one of his associates to purchase the property that the straw buyer had originally pretended to buy. The “recycled” straw buyer would then enter into a new purchase and obtain a new mortgage for a different property.
Instead of selling a straw buyer’s existing residence, in at least one instance, the lender was advised that the straw buyer would be keeping the existing residence to use as a rental property. MacMullin created a lease to reinforce this story and it was provided to the lender.
Manipulation of background information in the Mortgage Application
In addition to creating false transactions, MacMullin “improved” his straw buyers in order to allow them to qualify for the mortgages they were applying for. Since income is important, one of the improvements that MacMullin employed was to create employment letters and bonus letters. In one instance, MacMullin created an employment letter for a straw buyer’s wife to hide the fact she was receiving payments under the Alberta Income for the Severely Handcapped. He also provided her with a bonus letter to “cover” some of the additional costs associated with the fictional deal.
Other straw buyers had generally good credit, but were saddled with unacceptable levels of debt. Where this was a barrier, the problematic debts, such as credit cards, were paid off by MacMillian. Sometimes the proceeds from the mortgage advance that the straw buyer had qualified for were used to pay this debt post funding. The paid credit card voucher would then be provided to the lender to establish that the payout had been made.
Down payments were another area of concern for MacMullin. Lenders generally wanted to know where the down payment was coming from. As noted earlier, in some instances a false sale was documented. Gift letters were a second strategy. Straw buyer’s parents were asked to sign off promising fictitious gifts of cash for down payments. Where the lender would not accept a gift letter, a ficitious investment account, sometimes with one of MacMullin’s companies, would be used as the source of the down payment.
MacMullin even went so far as to create engagements and same sex relationships to backstop the application. The fact that a straw buyer might be married to someone else was not a deterrent. In one instance, MacMullin stole the identity of one proposed straw buyer who refused to participate in a false relationship.
Incorrect statements regarding the borrower’s principal residence
In order to maximize the amount being borrowed, many of the transactions involved straw buyers claiming that they would be moving into the new property. This allowed them to qualify for high ratio mortgages with minimal down payments. Straw buyers even signed statutory declarations or certificates stating the new property was going to be their principal residence. This, of course, was never going to be the case.
The MacMullin case is not notable because of any originality by the defendant and his associates. Most of the schemes they engaged in have been seen in hundreds of other mortgage fraud cases during this last down turn of the business cycle. However, it provides a compendium of many of the methodologies of the 2006-2009 boom/bust cycle – the “Strawman Cycle”. While we are indeed now wiser to these schemes and are putting systems into place to better identify and thwart them, those of you with perhaps a bit more grey hair will remember the 1980s cycle – the time of the dollar dealers. The more things change….
Francis N.J. Taman and Ksena J. Court practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.
 Ibid. at para. 143. Italics in original.
 One of the saddest features of this case is that the defendant apparently was not content simply to take a large portion of the extra cash – in one instance, he apparently told the owners that the cash that they gave him would be invested and the proceeds would be used to pay the mortgage. In actuality, the “straw buyers”, who presumably thought that they were investing in the house, made the payments. The original owners, who had agreed to the idea because they were cash strapped, ended up paying thousands to the straw buyers to buy their house back.
 Although the Justice used the label, “Sale of a MacMullin Property to a Straw Buyer”, the description makes it clear that we are dealing the classic straw man tactic of flipping a property or arranging a skip transfer of the property.
 Apparently MacMullin would sometimes use the same straw buyer on a second transaction without getting them to agree or even to sign any documents. All of the documents and information were forwarded to a second mortgage broker for a different deal.