More and more cases are being revealed because lenders are now casting a more watchful eye over their loan books and because increasing numbers of owners are defaulting on payments and being forced to sell, thereby revealing the present sale value of their property.
The problem is made more severe because the more that property prices fall from their previously (artificially) inflated levels, the greater the potential losses to the owner in default or to the lender looking to recoup their loan.
Mortgage fraud has taken on a number of guises of varying sophistication. There is the fraudulent mortgage application taken out on a property whose value has been dishonestly overstated, using a bogus survey as evidence.
The applicant may be fictional and once the sale of the property is completed, the arranger retains the difference between the amount paid by the lender and the amount paid to the builder. The lender will usually only discover the fraud when mortgage payments are missed and they take action to repossess to find the property unoccupied and the resale price to be much lower than the price that had originally been paid, leaving a shortfall in what can be rec-overed by selling the property.
One such operation, currently being investigated by the FSA, had targeted the lender Bradford & Bingley. Property developers, solicitors, bank employees and brokers have all been alleged to have played a part.
In other instances, the applicant may be real, being persuaded to buy, in particular, new properties, at an artificially inflated price. They will discover the fraud when they come to remortgage or sell. The survey will then reveal that they have been duped.
Where the applicant has taken out a loan they cannot afford, possibly as a result of giving fraudulent earnings’ information, they are more likely to be forced to sell and find themselves in negative equity.
The disclosure of false information has been another prevalent area of dishonest mortgage malpractice in recent months and years.
There have also been a number of property investment scams that do not include mortgages at all.
In one typical scheme, in return for an investment, the arranger will purchase a property and refurbish, let and manage it on the landlord’s behalf. The landlord might also be told there is an insurance policy in place to protect their returns during tenancy for times when the property is void of tenants.
However, the investor will find out later that the property is worth significantly less than they thought, possibly refurbished to a low standard (if at all) and located in a far less salubrious area that they had been led to believe.
Usually, the rental guarantee schemes would turn out to be not worth the paper they are written on. This was the nature of a £80m buy-to-let fraud investigated by the Serious Fraud Office in January this year.
A far more simple scam is that of selling property that one does not own. The recent abolition of documents of title and reliance upon electronic records, as well as the availability of key information on the internet, means that the fraudster can see exactly who owns the property and can assume the identity of the owner.
Under the Land Registration Act 2002, the holder of registered legal title can mortgage the property, leaving the true owner with a mortgage on the property. On an empty property, this can happen and regularly has.
Following the increase in reported cases of fraud, attention has inevitably turned to blame and how we can avoid future incidences.
There are, to resort to legalspeak, several parties who are part of the chain of causation.
Of course, the finger should be directed first and foremost at the authors of the crimes. The fraudulent brokers and introducers who have encouraged buyers to lie about their income on their mortgage application forms, the surveyors who have given bogus surveys which might, at best, be negligently inaccurate overvaluations and, at worst, intentional overstatements of the property value, and the applicant/owner themselves. Where it is a case of being duped, then it is easy to sympathise, less so where they realise that their income has been overstated on the mortgage application.
There is difficulty in blaming the developers, unless they were complicit in the fraud with professional advisers.
Where they have conspired with investors to inflate prices by adding incentives such as free fixtures and fittings in order to secure mortgages, then allegations of fraud could certainly be made. But if it is simply a case of the developer trying to sell at as high a price as possible, albeit in a property price bubble, then it becomes less easy to pass blame their way.
But what about the bodies that we might have hoped would have clamped down harder?
The FSA, for example, has arguably been inadequate in its monitoring of mortgage applications and needs to do far more to control brokers by banning guilty brokers and levying fines for fraud.
It needs to increase visits and audits (both frequency and thoroughness) of mortgage intermediaries to assess their financial crime systems and controls.
Following the proposals from the recent Turner review, we could see the FSA proposing legal and/or non-statutory guidance on loan to value or loan to income limits in the future.
The advantages and disadvantages of such measures are beyond the scope of this article but they could certainly serve to reduce the damaging effects of mortgage fraud.
Some Royal Institution of Chartered Surveyors’ certified surveyors, with their eyes on the bottom line, have been wilful colluders in these scams. We must look to RICS to make improvements and they are providing a way forward by drawing up new guidance on how to value newbuild properties.
The banks, which are often the ultimate bearers of the loss in these circumstances, are not absolved of blame.
Arguably, they should have been aware of the artificial valuations of properties they had been given rather than myopically trying to push through as many applications as their already risky lending models would allow.
Banks in the future will have to learn the lessons of allowing borrowers to overstretch themselves. They will also need better systems to check the identities of borrowers and the detail of their mortgage applications.
They should also scrutinise more carefully the providers of surveys. The Council of Mortgage Lenders should contribute to this with better rules on transparency in the valuation process and regulations requiring more comprehensive disclosure of the nature of discounts and incentives. There will also certainly need to be better co-operation between the FSA and lenders in future.
Years of steady house price inflation coupled with low interest rates have provided fertile soil for the trend of mortgage fraud to develop, thrive and be disguised. Indeed, if the bubble had never burst, it would arguably be a victimless crime.
Prices rising perpetually would always allow the losses to absorbed by market, the lenders to redeem their loans in full and the fraudsters to enjoy the fruits of their ill- gotten gains.
This has changed. It is unlikely that the UK’s culture of homeownership and property investment will die away and so it is the responsibility on those who have the power to control the processes of selling and lending to learn how to prevent these processes being abused.