You can label it however you want, if both the lender and borrower are willing participants, it will be difficult to prevent this from happening.
Like mentioned in the article, often times the material is very obviously suspicious and banks probably know this and still turn a blind eye to it because these borrowers are low risk and much less sensitive to the high/rising interest rates of today...
It's not that difficult. You just appoint an auditor and make the bank pay progressively higher fines until they figure it out.
American banks learned to be much better at it after 2008. And given 2008 and the MBS balance sheets at central banks and the municipal budgets propped up by property values and national mortgage programs intended to encourage homeownership, this is by no means just a matter between the bank and its clients, even if you put aside the money laundering angle. Mortgage fraud destabilizes economies.
> if both the lender and borrower are willing participants
Eventually this behavior goes overboard and everything crashes. In the meantime, law-abiding people are screwed by the bubble. Then they are made to pay for the clean up.
Fraud is costly, and rationalizing it contributes to the problem.
But the "fraud" is slowing the bubble. Without capita controls, PRC buyers would operate like any other international buyer, except there would be a shit load more of them who would do more cash purchases and outbit everyone else. This fraud to circumvent capital controls is why wealthy PRC buyers who liquidated their extra multi million dollar tier1 units only bought 1 house in Canada instead of 3.
The article discusses how they're not just buying one home outright. Far more profitable to put downpayments on 3 or 4 homes and just push that money to pay those mortgages while AirBnBing and renting a couple of them.
The article discusses one incident of person with Canadian tax residency with multiple mortgages, where the leaker allege is typical, when number of net worth assessments in low double digit per year suggest it's not typical. Not with 30k new Chinese Canadian immigrants per year, or 150k home sales in Ontario. From my experience (I know many people who facilitate this process in ON/BC) PRC buyers typically are not renters / airbnbers, they either live in their units part time / full time (or their kids) or leave it empty. Renting/slumlording/airbnbing is largely Chinese _Canadian_ affair, emphasis on Canadian, i.e. not wealthy, middle class who needs to make their capital work to cover costs. They speak mandarin and can insert themselves into the machine. Generally PRC buyers / big bidders aren't playing the RE game in Canada to play landlord. They just want to hide some of their assets abroad. The allegation kind of skips over that distinction, are these "diaspora" PRC individuals or Chinese-Canadians with access to PRC RE networks doing ponzi mortgages to try to get wealthy off Canadian RE. In my experience, it's the Chinese Canadians, because the PRC buyers were busy speculating off much more profitable (at the time) PRC RE, especially if whistleblower is talking about 2015-now time period.
> this behavior goes overboard and everything crashes
Maybe... but you need to keep in mind most of these people are not really building a bubble. Unlike the subprime mortgage crisis, where things were built on inflated valuations, many borrowers in this "scheme" do have more than enough funds to cover the entire mortgage. It's just that their capital is relatively illiquid. This is also why the high interest rates have not significantly affected this.
The effects on housing cost is because of natural market merging where chinese properties are "overvalued" domestically. This is actually not new, and happened with Japan at some point as well.
That being said, the main risk for this is actually geopolitical... Should capital controls tighten (or, like, if war were to occur etc.) then there is a much bigger risk, but many are banking on the fact that, at least given the signs today, that is still unlikely.
> Maybe... but you need to keep in mind most of these people are not really building a bubble.
No, I'd don't need to keep anything of the sort in mind. I've lived through multiple real-estate and speculation bubbles and crashes now. The arguments you make are the same sort heard before each one, and I can easily anticipate the rationales and excuses that will be offered after the next one.
You don't know how widespread this is. You don't know how many other banks are leaning on this latest house of cards, or how much of this is going on in the US and Europe as well. As far as the banks are concerned it's just one big world of suckers and they play these games everywhere, simultaneously.
And there is no "should." Capital controls will tighten. Wars will happen. Eventually, inevitably, the overhang destabilizes and this heinous crap will blow up.
> You can label it however you want, if both the lender and borrower are willing participants, it will be difficult to prevent this from happening
These aren't purely private transactions. If HSBC Canada fails, Ottawa is on the hook. The defrauded party here is the public. (And possibly the bank's lenders and shareholders.)
This is somewhat counterintuitive but... the fraudulent mortgages are not more risky, they are often times more stable than other local borrowers.
I think what many people are imagining is the subprime mortgage situation of yore. But in this case, a lot of the "fraud" is the result of knock on effects from capital controls in the PRC. Many (new and aspiring immigrants) have capital from sales of their property in China, but due to capital controls, cannot get it out quickly. They have to do it in $50k/year chunks.
Usually a loan or mortgage is the solution for this, but those depend on _income_ rather than _wealth_, so normally these people can't take out as much as they need to, even though they could easily back actual value of the mortgage. So there's a little collusion between banks and mortgage brokers to get in on this market gap (probably more so now that interest rates are high, which these borrowers are much less sensitive to).
Of course, there are risks, but those risks are tied to more geopolitical circumstances and less market-driven, and apparently banks are more willing to take their chances on that.
The issue here is that the geopolitical risks are hard to separate from the market risks.
If BC property is being fraudulently leveraged against Chinese real estate, opaque decisions by the ccp can dramatically impact default rate for Canadian loans.
No market actor would expect that in a non-fraud based market. Instead a transparent pricing of Chinese assets would show them as much less valuable on a risk adjusted basis than their book wealth value. Especially compared to western income or equivalent wealth.
They don't offer these services to anyone. Because the paperwork is fraudulent, a lot of people involved are/will be personally implicated (could easily lose their job and/or face legal challenges on top) in the scheme. It's not like banks are not monitoring delinquency/default rates already, and if the stats are start indicating problems they will certainly investigate...
So while outside observers can't verify anything, those perpetrating the scheme do have to balance their own personal risk and many will in exchange request invasive details around the clients' assets in China to cover their own ass. Not admissible evidence to the bank, of course, but they're not handing these out like candy.
> The Chinese property market is in freefall.
Realistically, people involved have already sold so this doesn't affect them. At least in the Vancouver area, the brokers (who are the usual point-of-contact to the clients) won't even proceed unless you've already sold and have the cash.
> And capital controls can get tightened.
This is the main real risk that those in the scheme look out for, but it's a geopolitical risk rather than a market-based one. Which makes more sense when rates are high, like now. When rates were low, this didn't happen as much since there are plenty of clients to go around.
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Also, in the grand scheme of things, even if the bubble bursts, the broader economy is still not worse off. Each cent paid into these mortgages is real "new money" being introduced into the economy. This is not the subprime mortgage days where at the end it became just a transfer of wealth to the banking industry. For the most part "the public" is not the one being defrauded, it's China...
> while outside observers can't verify anything, those perpetrating the scheme do have to balance their own personal risk
Everyone in every corrupt scheme says this. The rule of law wins, in the long run, because these structures aren’t robust. They get perverted and subverted, and while it’s nice to imagine a bunch of competent crooks keeping up their shop, the reality is we have rules for a reason.
> it's a geopolitical risk rather than a market-based one
Capital controls aren’t geopolitical. Neither is an offshore property market bursting.
The borrowers are borrowing against an doubly-illiquid asset. Buy long, borrow short—this has been a widowmaker since antiquity.
> even if the bubble bursts, the broader economy is still not worse off
Canadian banking would collapse. You’d see the equivalent of America’s 2008 crisis, except while the rest of the world has high rates. If allowed to fester, or if it already has, that’s a generation’s quality-of-life gains going down the tube.
I agree with all the points on top. The proper instrument to do this would be banks setting up a system that lets people borrow against an illiquid asset, in this case would be CNY, but it's not anything new... (and is one proposal for how to work with cryptocurrencies). That would price in the political and market risks.
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The last one I don't agree with. This is different from the 2008 crisis in that the 2008 crisis was primarily "internal" and for the most part zero sum --- some people gained, some people lost (kind of loosely like a long-horizon pump-and-dump scheme), and at the end things revert to the original non-inflated value.
This situation is more of an encouragement of external injection _into_ the economy. Rising prices are due to external capital flowing in (and the anticipation of more to come). Even if it were to pop, things would be no worse than a hypothetical alternative timeline where there was no bubble. And that's assuming no external capital actually flowed in, that not a single person wired money into the country. Clearly this is not true, and the money coming in is still net positive. So _in aggregate_, the economy is still improved due to the injection. Again, these gains are not spread evenly, and it may be the case again that some individuals will be hurt while others reap large returns.
> a generation’s quality-of-life gains going down the tube
If anything, that just means the previous quality-of-life gains were achieved by overdrawing against the future... nothing new here.
Willing participants huh. Was the taxpayer a willing participant when we had to pay for the monumentous fuck up of 2008? Did the banks and investors pay for it, go to prison? Pretty sure it was just one scapegoat and that's it.
From the mortgages, just as they should, and just as the borrowers (i.e. "the willing participants") deserved to pay - it's not a burden on some unrelated taxpayers.
I won't throw a stone at anyone trying to circumvent chinese capital controls. Though Canada isn't the place I would go to escape financial repression.
