Global Assets, July 2012 – Stephen Gilchrist article on fighting mortgage fraud

Fighting Mortgage Fraud

19^th July 2012

By Stephen Gilchrist, solicitor and Chairman and Head of Regulatory Law, Saunders Law Limited

In January 2011, the National Fraud Authority published its second annual fraud indicator which estimated the cost of mortgage fraud in the UK to be lb1 billion. One might assume that in times of austerity the urgency to borrow money might well lead to more instances of fraud.

The definition of fraud in the Fraud Act 2006 covers fraud by false representation and by failure to disclose information where there is a legal duty to disclose. False representations can be made explicitly or implicitly and may occur even where it is known that the representation might be misleading or untrue.

The value of a mortgage obtained through fraud is the proceeds of crime. Under the Proceeds of Crime Act 2002, a money laundering offence might be committed if anyone acquires, uses, has possession of, enters into an arrangement with respect to, or transfers this criminal property.

Mortgage fraud can range from stretched borrowers misleading a lender to secure a loan, to organized criminal rings defrauding lenders with the help of corrupt brokers, solicitors and valuers. In theory, lenders will act out of self-interest to reduce losses from fraud. However, the desire to acquire business and economize on process may cause lenders to run fraud risks.

Opportunistic mortgage fraud by borrowers may involve incorrect information about:

• • identity

 

• • income

 

• • employment

 

• • other debt obligations

 

• • the sources of funds other than the mortgage for the purchase

 

• • the value of the property

 

• • the price to be paid and whether any payments have been, or will be made, directly between the seller and the purchaser

 

Large scale mortgage fraud is usually more sophisticated and involves several properties. It may be committed by criminal groups or individuals (the fraudsters). The buy-to-let market is particularly vulnerable to mortgage fraud, whether through new-build apartment complexes or large scale renovation projects. Occasionally commercial properties will be involved. The common steps are:

• • The nominated purchasers taking out the mortgage often have no beneficial interest in the property, and may even be fictitious

 

• • The property value is inflated and the mortgage will be sought for the full inflated valuation

 

• • Mortgage payments are often not met and the properties are allowed to deteriorate or used for other criminal or fraudulent activities, including drug production, unlicensed gambling and prostitution

 

• • When the bank seeks payment of the mortgage, the fraudsters raise mortgages with another bank through further fictitious purchasers and effectively sell the property back to them, but at an even greater leveraged valuation

 

• • Because the second mortgage is inflated, the first mortgage and arrears are paid off, leaving a substantial profit. This may be repeated many times

 

• • Eventually a bank forecloses on the property, only to find it in disrepair and worth significantly less than the current mortgage and its arrears

 

Other types of fraudulent behavior can arise from:
^azc Fraudulent use of an equity release scheme whereby home owners receive an offer from a third party to purchase the property while the home owner is allowed to rent the property. The home owner is given the option to purchase the property back when their financial position improves

^azc Application Hijacking involves criminals intervening before completion of a mortgage, falsely claiming to be the new representatives for the purchaser. They thereby obtain the mortgage advance in place of the real purchaser

^azc After the event mortgaging. While re-mortgaging and re-financing may be common during an economic downturn, the use of apparent equity to access mortgage funds is an avenue also exploited by criminals

Warning Signs
Some (but not all) of the things to look out for:

• • A purchaser/borrower's apparent disinterest in the transaction

 

• • Utilization of a firm of solicitors which does not normally undertake this type of work

 

• • In the case of inter company transactions, are the companies connected?

 

• • Does the client normally involve themselves in properly investment?

 

• • Short period of ownership by the seller

 

• • Borrower's credit history is shorter than may be expected

 

• • Explanations given for back to back transactions

 

• • The history of the property and whether there have been recent sale and purchases

 

• • Funds for the deposit being provided by a third party

 

• • Significant recent increase in value of the property

 

Saunders Law is a central London law firm with 37 years' litigation experience, particularly known for its work in criminal defence, motoring, fraud, regulatory and litigation