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...
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.
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.
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.
Out of curiosity, why? China's stock market is melting down in the midst of persistent deflation. A lot of people who thought they had liquidity may not anymore. Beijing could open the taps, but then that puts pressure on the currency.
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.)
The whole point of the money laundering operation is to get the money out of the country. China going to pot only accelerates it.
This is a "heads, I win", "tails, you lose" type of scam. The mortgage holders are all judgement proof. They have no income or assets to go after. So if the housing market crashes, the banks have no recourse.
It's the same as taking out a mortgage and instead of buying a house, you go to the casino and bet double or nothing. Sure, the intention to pay back is there. But it is contingent on the investment performing, and the bank is taking on unknown risks.
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 housing market must first crash before the problem is tangible, and there's no sign of that happening.
If new construction wasn't so aggressively blocked in some major cities (San Francisco, Boston, all of Canada it seems), then the rents would not be nearly as high as they are.
Wealthy property owners are behaving a lot like a cartel in many places.
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.
You have to have money to launder it. Also, if the currency keeps getting hammered, Beijing will crack down on the exit channels.
If Canadian banks agree with this risk assessment, they have little incentive to actually verify income in these cases.
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.
Most investment is in real estate, which has remained fairly stable in Tier 1 cities (which is where most of the post-2008 Chinese Canadians are from)
To get more than the $50k limit out, people would use a hawala type system where you'd use assets in China as collateral and get guaranteed cash from a broker abroad.
Most Chinese aren’t buying British Columbian property.
> accredited investor qualification is much harder to get than in the US
On a relative basis, right? In absolute terms, it’s still very low. Similar to the practical requirements for opening an American brokerage account.
> Most investment is in real estate, which has remained fairly stable in Tier 1 cities
Do you have data for this? My impression was sales are being discouraged.
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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.
This is why trade with known tax havens should be banned, because no tax havens have large markets to capitalise. It's such a racket.
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.
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.
Again.
Yep. They don't buy Chinese stocks either. They would invest in property within China.
The kind of Chinese moving to Canada (and Australia) after 2008 aren't "most Chinese".
They tend to be from much more affluent and connected backgrounds. Think businesspeople, large property owners, or middle level party members.
Upwardly mobile Chinese (eg. Those in the tech industry or finance) will target the US or Singapore if they emigrate because they can keep their careers - something which Canada absolutely sucks at (eg. Most foreign degrees aren't recognized, white collar salaries have largely stagnated since the 2000s, blue collar work like oil drilling pays much more)
Blue collar/middle class Chinese tend to target Malaysia, Thailand, or Singapore because it's easy for Chinese to emigrate and average salaries are higher and they can blend in as the Chinese diaspora is massive in all those countries
> On a relative basis, right? In absolute terms, it’s still very low. Similar to the practical requirements for opening an American brokerage account
But faith in it is low for most Chinese. The 2015-16 market crash was extremely volatile.
Also, stock investing is a new concept for a lot of Chinese - stock markets started unofficially in the 1987-1991 period, didn't formalize until 1997, and most companies preferred listing in Hong Kong or Singapore until the 2010s.
Also, if you have a finite amount of cash, you would be chasing the highest stable returns, and for most of the post-Mao era, that was in real estate.
> Do you have data for this
I'm using Shanghai as my example, but it's the same story for Shenzhen, Beijing, and Guangzhou - the Tier 1 cities.
The real estate bust happened in cities outside of those, but specifically, in property located outside the "Inner Ring"
Chinese cities are planned with 3 rings - an Inner Ring with all the businesses, government offices, and residential property of people working for both, a middle ring that would often be industrial but increasingly converted into residential, and an outer ring that was farmland until 10-15 years ago when it was converted to residential.
It's that expansion of outer ring construction in all cities across China that caused the property bust.
Inner Ring residential property is basically VIP. Those are the kinds of people buying property in Canada.
From 1995-2021 [0] From 2022 [1]
[0] - https://www.statista.com/statistics/1325915/china-average-pr...
[1] - https://www.statista.com/statistics/243404/sale-price-of-res...
The OP is right, the income isn't real. It's right there in the article: "Aurora branch had direct knowledge of faked Chinese income mortgages"
You assumed that the OP assumed something. Then you assumed that the OP's (non)assumption was motivated by jingoism.
Comments like yours are the worst.
I'm not surprised that some Chinese (or any) immigrants in Canada try to take advantage of the linguistic barrier to obtain credit. And since important Canadian documents are often less standardized than in other countries, one can surely employ a bit of artistic creativity with a stamp here and a stamp there to put through a false document.
I've personally dealt with fraudulent credit applications, submitted and approved, because the bank employee (Canadian, no relation to the client) wanted to improve his numbers. At least when I was involved in credit, because of the workflow, the middle office made decisions first based on the numbers provided to them by the front office. Of course they were supposed to control all supporting documents but they weren't exactly zealous and if you knew their work habits, you could probably deduce the best time and language for the submission of a questionable application.
This is HN's vaunted grace?
From what I responded to:
> You can't meaningfully garnish the wages of a part time casino dealer.
It is entirely plausible that there are oodles of untaxed income getting funneled over there from hasty emigrés.
No need to get vituperative, good grief.