Earlier this year, a mother and son who used self-certification to commit systematic mortgage fraud with buy-to-let properties were jailed.
Not long after, a gang that included a policeman, a solicitor and a surveyor were also convicted of mortgage fraud worth £20m. Similar cases are frequently in the headlines and many have emerged since the financial crisis. Several only became apparent once the mortgage market began to slow down and some have been so complex they have taken years to resolve.
In its 2013 Annual Fraud Indicator report, the National Fraud Authority estimates the annual loss attributed to mortgage fraud at £1bn. Based on the National Hunter anti-fraud data-sharing system, it believes there were 6,621 cases in 2012 with an average advance of around £121,000.
Unfortunately, statistics suggest that in 2013, mortgage fraud is more rife than ever before. A report by Experian says that attempted mortgage fraud rose to 38 cases in every 10,000 applications in 2012, up from 35 per 10,000 in 2011. Chart 1 shows the rise in mortgage fraud compared to all other types of fraud from 2006 to 2012.
Hardship
Some 89 per cent of those frauds were by individuals misrepresenting their financial circumstances such as income, credit history or employment status. This first-party mortgage fraud is fuelled by the economic squeeze coupled with the tighter criteria adopted by lenders in the aftermath of the credit crunch and in anticipation of the new regime due in 2014 following the Mortgage Market Review (MMR). Financial hardship is definitely a factor driving the rise in attempted fraud and the tightened lending criteria that have come into play simply add to the temptation.
So how much scope is there for the frauds committed at the height of the mortgage market to be carried out now? Clearly, it is not just that hard times and more stringent criteria are pushing people to behave dishonestly; lenders are being affected by the same factors. In the current environment of funding shortages and flatlining – if not falling – house prices, and with primary responsibility for assessing affordability, lenders are keen not to let their money fall into the hands of fraudsters. They have had to get a lot better at detecting fraud; as Experian points out, the increased scrutiny, stress-testing and affordability checks have enabled more frauds to be detected.
The Council of Mortgage Lenders (CML) has been involved in work that the FCA under its previous guise, the FSA, carried out to produce a set of guidelines for lenders to help detect financial crime. These include procedures for helping to detect and prevent application, identity, valuation and registration fraud in the mortgage lending process.
For example, lenders now make detailed checks of mortgage applications to combat potential fraud. Credit reference agencies such as Experian and Equifax are used to check the applicant’s address, credit status and any other issues such as repossessions or county court judgements.
Less relaxed
Mortgage advisers also have to be more alert to fraud. A few years ago, in the course of its research for the MMR, the FSA found that most small mortgage brokers were aware of factors that could indicate an application might be fraudulent. However, only 41 per cent verified applicants’ income and only 11 per cent obtained evidence of the source of applicants’ wealth.
Today there is less room for such relaxed attitudes. Openwork has published a guide for advisers to help them spot mortgage fraud. Things to look out for include false occupations and earnings details and fraudulent evidence of income, including false payslips.
Even business introducers should be checked out. The report recommends advisers set up introducer agreements and suggests questions to ask and warning signs to look out for. The report provides guidelines to advisers to ensure they do not unwittingly participate in money laundering or types of mortgage fraud such as a buy-to-let property purchase being passed off as residential purchase; deposit fraud where the borrower claims to have sourced the deposit from savings when it came from a loan; or defrauding the lender of the mortgage advance.
However, even mortgage advisers can be involved in mortgage fraud as some recent high-profile cases illustrate. While mortgage fraud can involve borrowers being dishonest about the state of their income or employment details, it can also be done on a much grander scale.
Experian reports that third-party fraud, which involves identity theft and/or collusion with mortgage professionals such as solicitors, valuers and brokers, makes up 11 per cent of mortgage fraud, but the losses to lenders are usually greater. Mortgage fraud perpetrated by a criminal gang with a professional on board can be much harder to detect.
Things can only get worse, suggests Experian. It predicts fraudulent applications will continue to increase throughout 2013, driven by economic hardship in households and tighter lending criteria. There are two ways of looking at this. On the one hand, the rise in the number of detected frauds means more people have been caught attempting mortgage fraud. That is good news because it suggests the more stringent checks carried out by lenders are effective. On the other hand, if the economic squeeze is pushing borrowers to make this many attempts at fraud, how many more sophisticated frauds are evading detection and being successfully perpetrated?
