Second mortgages not new, uncommon: insiders

A London mortgage broker says 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.

“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. E. 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 twoyear probe 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.

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 of which Forest City Funding is accused 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.

"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 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.

“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 from their parents or another backer.

“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 brokering, 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 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.”

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.

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