The Financial Services Authority (FSA) warned: “Some homeowners facing financial difficulties may want to sell their property quickly to ease distress, or perhaps avoid repossession, and put the problems behind them.
The FSA said buyers can offer sellers discounts of 20 -35% below the market value of the property, alongside a promise to complete the deal within 48 hours, or in cash and to help them avoid estate agency fees.
The sale becomes fraud if the buyer asks the seller to state the property is being sold for the full market value rather than the discount agreed, it warned.
This way the buyer is getting a no-money-down property deal and the mortgage lender thinks a substantial deposit has been put down as security for the loan.
“The bigger the deposit paid by the borrower, the more likely their mortgage application will be approved and the lower the interest rate charged,” said the regulator.
For example, if the buyer is paying £120,000 for a property they might not be able to borrow the full amount they have agreed to pay, even if it has been valued at £150,000. However, by telling a mortgage lender they are buying the house for £150,000 but only need to borrow £120,000 – 80% of the inflated price – the buyer may be able to access some or better mortgage deals.
The regulator suggested consumers should talk to their lenders first if they are struggling with mortgage payments and also warned against other options like Sale and Rent Back from unauthorised firms.
In May this year, Mortgage Solutions ran a story on no-money-down buy-to-let deals where buyers bought for knock-down prices or borrowed the deposit from a bridging lender and used two solicitors to mask a fraudulent 100% mortgage deal.
John Grant, operations partner at BMV Property Investment Deals, said: “The FSA isn’t stating anything that isn’t known to all legal and mortgage professionals and should be common sense to the honest applicant. Mortgage fraud is a crime ~ period ~ and no UK lender will knowingly accept 100% BTL mortgage risk.
“In my view, it has always been a lenders ultimate responsibility to ensure correct questions are answered and checked via questionnaire by applicant, broker and solicitor. Then, if reasonable defensive measures are breached and fraud does emerge, conviction is straightforward with defaulting professionals receiving maximum sentences as deterrent.
“Whether they be the mortgage applicant or the professional ‘advising’, convicted fraudsters may be ordered to pay a steep fine, go to prison for up to 10-years and have all assets obtained through their crime seized. Future credit rating is trashed, job/career prospects compromised and a social stigma held over the family for maybe generations,” he added.
Robert Sinclair, CEO of AMI said the broker may not be the first link in the chain to spot this, but he or she should certainly pick it up.
“Any lender will run from this deal and the valuer should certainly spot the gap between the valuation and the purchase price, swiftly followed by the lender. But every link in the chain should be aware that the property is mis-priced,” he said.