Ontario court of appeal rules in favour of homeowner who was victim of mortgage fraud, Spring 2007

As we have previously reported in our news bulletin last month, a special five-judge panel of the Ontario Court of Appeal has essentially reversed the Court’s own decision from 2005 in setting aside a fraudulent mortgage.

In this ruling, the Court of Appeal reversed its controversial decision in the case Household Realty Corporation v. Chan which found that a mortgage although fraudulently obtained, was valid and enforceable upon registration. In this recent decision, Lawrence v. Wright [2007] O.J. No. 381, the Court of Appeal acknowledges that the result and the reasoning in the Household Realty case was incorrect.

In the Lawrence case, ownership of a person’s home is fraudulently transferred and mortgaged. The court acknowledged that even assuming that the homeowner and the lender are both innocent parties, in a contest between the two, the homeowner should win on the analysis that the homeowner has no opportunity to avoid the fraud where by contrast the mortgage company may have had an opportunity to avoid the situation.

Partly in response to public outcry from the rise in mortgage fraud and the problems associated with the Household Realty case in particular, the Ontario government passed the omnibus Bill 152 late last year. This legislation attempts to address mortgage fraud issues and, amongst other things, will allow the deletion of fraudulent instruments from the Land Register.

The Ontario government has also promised to improve the much criticized system of compensation administered through the Land Titles Assurance Fund which has been plagued from inception by administrative difficulties.

Lenders should note that it appears the Ontario courts will be examining their actions and vigilance in reviewing these mortgage fraud cases. Lenders will have to do their due diligence if they want to protect themselves from fraud.

As a result, the innocent borrowers will not lose their home and the innocent lender or purchaser will have to recover its funds from the Land Titles Compensation Fund.

The government is also attempting to improve the system of compensation from this fund which has up to now been set up and operated as a fund of last resort.