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...
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.)
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.
You don't know. The paperwork's fraudulent.
> Many (new and aspiring immigrants) have capital from sales of their property in China, but due to capital controls, cannot get it out quickly
The Chinese property market is in freefall. And capital controls can get tightened. Either condition will result in default.
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...
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.