There are some things you know are wrong but that you choose to ignore. I try never to acknowledge how well Simon Cowell’s prodigies do in the charts for instance – it’s my own elephant in the room. Fraud is the mortgage world’s equivalent of Jedward. It’s been lurking in the background for ages. But in the past, we just ignored the danger. Now it’s only too obvious the threat it poses.
As lenders try to tackle the fraud oozing out of their back books, the perpetrators of fraud are finding more elaborate ways of conning banks and building societies out of their cash.
The Sting
The elaborate new techniques for defrauding lenders aren’t being developed by individual borrowers. They try to obtain a higher mortgage than they are entitled to by providing incorrect information about their identity, income, employment, debt obligations, the value of the property, the price to be paid and whether any payments have been made, directly between the seller and the purchaser. It’s simple stuff.
Large scale mortgage fraud is where we are seeing all the innovation – which is far more sophisticated than borrower fraud.
A common fraud includes inflating the property value and seeking a mortgage for the full amount; failing to pay the repayments and allowing the property to deteriorate. Next, the same properties are used for other criminal or fraudulent activities, including drug production, unlicensed gambling and prostitution and 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 themselves but at an even greater leveraged valuation.
As a result, because the second mortgage is inflated, the first mortgage and arrears are paid off, sometimes 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.
Sometimes fraudsters sell a property between related private companies, rather than between fictitious individuals. The transactions involve inflated values, and will not be at arm’s length. Increasingly, fraudsters are using offshore companies, with the property sold several times within the group before approaching a lender for a mortgage at an inflated value.
Fraudsters also often try to resell a property very quickly. This process is called flipping, and usually involves back-to-back sales of the property. Sometimes the first mortgage is not registered against the property and not cleared after completion of the second sale. Sometimes the second purchaser may be fictitious, using a false identity or be someone vulnerable to pressure from the fraudster. And occasionally, a mortgage may only be obtained by the second purchaser and for an amount significantly higher than the value of the property with the profit going to the fraudster.
The cover: Use professionals
Lenders often rely on other professionals to verify the legitimacy of a transaction and safeguard their interests. But the professional sector is exactly where the biggest, newest, and most sophisticated threats lie. In a rising market, some lenders failed to verify information they receive, which left them wide open. Fraudsters will usually use at least one professional at the core of the fraud, to direct and reassure other professionals acting at the periphery. Brokers and introducers have been used in this role in the past. Solicitors can also be part of the problem. They can complete transactions and transfer a property’s title in accordance with already exchanged contracts. A lender who has received the loan applications and already approved the loan may approach a solicitor with packaged transactions and completed paper work. Solicitors can alter the value on the Certificate of Title given to the lender. They can carry out their checks less diligently. If a solicitor has unwittingly assisted a fraudster previously, they can be blackmailed into becoming involved in more aggressive frauds.
Fraud for profit is almost always acted out between different parties involved in the property transaction process and over the last couple of years it became apparent that collusion is rife. For lenders, up to date technology and diligent panel management are vital in tackling any collusion between industry players. To combat this, many institutions are reducing the size of their panels. This is a start, but, as we’ve advised many lenders, it is essential you have secure technology in place to communicate with your external partners, too.
Lenders should bring the selection of valuation firms and the quality management of the valuations process under their direct control. Individual lenders using individual systems will only get the collective lending community so far. To outwit the fraudsters once and for all, lenders should work together to combat collusion.
