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Mortgage Solutions, June 2012 – Stephen Gilchrist talks about fraud in the buy-to-let sector

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Buy-to-let: The fraudster's honeypot

11 June 2012

The buy-to-let sector is increasingly being targeted by fraudsters. Stephen Gilchrist a solicitor and head of regulatory law at Saunders Law outlines the hazards

Last year, the National Fraud Authority published its second annual fraud indicator which estimated the annual cost of mortgage fraud in the UK at lb1bn. This is a figure that can only rise.

However, the buy-to-let market is particularly vulnerable to mortgage fraud, whether through new-build apartment complexes or large scale renovation projects. Here's a list of fraud tripwires to be aware of.

"c The nominated purchasers taking out the mortgage often have no beneficial interest in the property, and may even be fictitious
"c The property value is inflated and the mortgage will be sought for the full inflated valuation
"c 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
"c 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
"c Because the second mortgage is inflated, the first mortgage and arrears are paid off, leaving a substantial profit. This may be repeated many times
"c Eventually a bank forecloses on the property, only to find it in disrepair and worth significantly less than the current mortgage and its arrears

What is fraud?

The value of a mortgage obtained through fraud is the proceed of a 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 organised 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 everything from identity, income and employment to outstanding debt obligations or sources of funding.

Large scale mortgage fraud is usually more sophisticated and involves several properties. It may be committed by criminal groups or individuals.

Examples of other types of fraudulent behaviour show all sectors of the mortgage market are also under threat.

  • 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

  • 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

  • After the event mortgaging. While remortgaging and refinancing 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 for brokers

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

"c A purchaser or borrower's apparent disinterest in the transaction
"c Utilization of a firm of solicitors which does not normally undertake this type of work
"c In the case of inter-company transactions, are the companies connected?
"c Does the client normally involve themselves in properly investment?
"c Short period of ownership by the seller
"c Borrower's credit history is shorter than may be expected
"c Explanations given for back to back transactions
"c The history of the property and whether there have been recent sale and purchases
"c Funds for the deposit being provided by a third party
"c A significant recent increase in value of the property

Stephen Gilchrist is a solicitor and also chairman and head of regulatory law at Saunders Law

Link to article on Mortgage Solutions

 

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