The past couple of weeks have seen a couple of shocking fraud stories appearing in the mortgage press, prompting fears that financial crime is on the increase.
First up was a story of how a gang in the West Midlands used Land Registry information to access information on home owners before remortgaging their properties without their knowledge.
Then the Metropolitan Police confirmed that it had made several arrests in its investigation into suspected large-scale mortgage fraud on 84 new build properties in Thamesmead, South East London.
Not the first time
The first story prompted many in the industry to criticise the Land Registry for the ease at which personal information can be obtained.
For £10, a registered user with the Land Registry’s website can obtain a copy of the lease, giving anyone, including potential fraudsters, a wide range of information on a property, including the owner’s signature.
In this case it was thought the gang posed as potential buyers for the property and gained information of its title and registration through the sales process. The fraudsters then pulled out of the deal at the last minute, having applied for a mortgage on the property. They then converted the mortgage money into gold bullion.
Jonathon Barnett, director of broker All Mortgage Matters, says it is not the first time this kind of thing has happened and he lays the blame firmly at the door of the Land Registry.
“This happened to a client of mine a couple of years ago. She had an unencumbered property and was letting the property out to tenants. She wanted to raise some capital on the property for business purposes and applied for a mortgage. But when her solicitor checked the Land Registry, he found the deeds were no longer in her name and there was a £150,000 loan on the property.”
Kent police got involved and found that the same thing had happened with six properties in adjacent roads with a total of £2 million in loans against them – none of them taken out by the rightful owners.
Barnett says: “My client’s tenant was being evicted at the time and there appeared to be a link between the tenant and the fraudsters – and the police also believe a dodgy solicitor was involved.”
Picking up the pieces
More than 18 months later, Barnett’s client is still sorting out the mess made by the scam. Although the property title has been transferred back into her name, there is still a £150,000 loan on the property outstanding, preventing her from selling it. She has made a claim against the Land Registry which has, rather unhelpfully, misplaced the file.
Barnett claims the main problem is that the Land Registry is willing to send confidential information to an address that is not the property address.
“What should happen is correspondence should only be directed to the property’s address on the Land Register, rather than a correspondence address. Then people trying to do this would never receive the information and that way they wouldn’t be able to sign anything,” he says,
“To get a mortgage on the property, you would, at some point, have to sign something so maybe the system is not robust enough to stop documents getting through without the correct signature.”
Not the only method
Unfortunately remortgaging a property that is not rightfully yours is not the only way to commit mortgage fraud – if you flick through some recent stories in the trade press, you could easily think the industry is rife with fraudulent activity and scams.
Regarding the police investigation into the flats at Thamesmead, officers have established that between May and November 2006, a company bought 84 off-plan new build flats.
The company then re-sold the flats at greatly inflated prices using mortgage brokers and chartered accountants to fraudulently provide inaccurate mortgage applications for the genuine buyers.
The fraud came to light when the flats came to be sold or repossessed and the true property value was realised by the lender. Police reckon the fraudsters made £3-£4 million from the scam.
There was also a case some months ago where a tenant whose landlord was overseas stole the landlord’s identity, obtained some information about the property from the Land Registry and then remortgaged the property, pocketing the additional mortgage funds. Living in the property helped him to commit identity theft.
But if you want to be an identity thief and do not have access to someone else’s documents and post, the internet is a good place to start. There are numerous websites selling fake identitys, utility bills and payslips and, with most sites based offshore, the police seem powerless to close them down.
Hamptons International Mortgages managing director, Jonathon Cornell, says fake documentation and new build are the two areas where the vast majority of mortgage fraud occurs.
“While some people are nervous about electronic verification, it is a much more robust system and reduces the opportunity to use fake documentation. Brokers and lenders need to work more closely and share more information, but issues like data protection tend to hamper this,” says Cornell. “It is far too easy for people to obtain fake documentation and something needs to be done to shut these websites down. There must be a way of treating their activities as a means of committing fraud.”
Valuations on new build flats have been a problem recently and with the government insisting on a high density of properties on new build developments, the number of flats is quickly rising.
It should not have been too difficult to work out what impact this would have on the price of flats and, as a result, developers will now often accept big discounts to get rid of flats, but do not need to do that for houses. “This sort of distortion of the market encourages fraudulent activity in terms of large, ‘under the counter’ discounts being given on flats and not reported to lenders,” says Ray Boulger, senior technical manager at John Charcol. “It also encourages the sale of flats at a big discount to a bulk buyer, who then resells to individuals at a higher price shortly afterwards; this is not necessarily fraudulent, although the Thamesmead case reported in The Sunday Times was. This is why some lenders have restrictions on the maximum loan-to-values on new build flats but not new build houses.”
Highlighting consequences
At the most basic level of fraudulent activity is application fraud, where an individual knowingly submits incorrect or misleading information on their mortgage application, such as an inflated income or applying for an owner occupier mortgage when they fully intend to let the property. In these cases, the lender does not necessarily lose any money, although there is an increased risk of doing so.
“The crisis in the US non-conforming market has highlighted the consequences of falsifying income to borrow more than you could otherwise afford”, explains James Cotton, mortgage specialist at London & Country. “Instances of crime and fraud will often increase in a booming housing market due to opportunities to make a quick buck from buying and selling or re-financing properties.”
Experts say that despite the barriers in place to deter mortgage fraud, including money laundering checks, a clever fraudster will often achieve their initial objective of siphoning off funds, even when the broker and lender involved have been diligent. Websites such as Confidential Access and Replicadocs are part of the problem. The fake – or ‘fun’ as the site describes them – passports, driving licenses, P60s, payslips, and proof of address the sites offer are of such good quality even auditors cannot tell them apart from a real document.
“In this situation there is no chance of a broker or lender identifying them as fraudulent and therefore something else about an application would have to be suspicious for the broker or lender to query it further,” says Boulger. “Obviously, lenders have access to much more electronic information on applicants than brokers and so will have more chance of identifying a fraudulent application. The increasing use of electronic identity verification and automated underwriting should catch out some fraudsters who expected their application to be underwritten on the strength of the paper documents they supplied.”
Boulger says that the availability of information from the Land Registry can only help fraudsters, especially when combined with information they can obtain by other means. Land Registry information used to be confidential but you can now log in to its website and see the amount of someone’s mortgage and which lender it is with.
“I find it surprising that the Data Protection Act doesn’t stop this sort of private information being made available to anyone and everyone. I can only assume that, on the assumption the government doesn’t want to encourage fraudsters, there was no joined-up thinking in government with a robust risk assessment being undertaken before the Land Registry agreed to make all this previously confidential information readily available to anyone online,” says Boulger.
Worryingly, in both the Thamesmead and West Midlands cases, there appears to have been collusion by various professionals such as a solicitor, accountant, valuer or broker. Whenever there is collusion it is always much more difficult to detect a fraud.
Other fraud cases where professionals have been involved include private bank BNP Paribas, which was fined £350,000 by the Finacncial Services Authority (FSA) for weak anti-fraud controls after a senior employee of the bank fraudulently transferred £1.4 million out of clients’ accounts without permission. And last month saw the FSA ban broker, John Adebayo Adepoju, and cancel the permission of his firm Landmark Finance for knowingly submitting fraudulent financial documents as part of the application process.
Working together
This year the Council of Mortgage Lenders (CML) and the FSA have been working together to combat fraud in which the intermediary is suspected of involvement such as in the Adebayo Adepoju case. This sort of activity is very rare, but the CML is encouraging lenders to take part in an initiative so that the industry can build up a better understanding of the threats posed by fraud.
The FSA has asked for as many firms as possible to report to them, on a voluntary basis, cases of proven or suspected mortgage fraud, where there is a strong suspicion of involvement by intermediaries.
CML communications manager, Bernard Clarke, says: “Fraudulent mortgage applications represent only a tiny fraction of those submitted to lenders. But across the financial services industry as a whole, the threat of crime is growing.
“Firms across all areas of activity are involved in a sort of technological ‘arms race’ with organised criminals as they seek to outwit each other. As the FSA points out, technology favours attack rather than defence. Firms have to protect their systems against all threats, while criminals can potentially exploit a single weakness – if they can find one.”
Across the financial services industry as a whole, the targeting of firms and their customers by criminals is becoming more widespread and more complex. Many commentators agree there is now scope for a national fraud strategy.
Potentially, the cost and the loss of credibility can be considerable for firms. Given how serious the consequences can be, it is becoming more important than ever before for lenders to make sure they put sufficient resources into combating fraud.
Lenders themselves are reluctant to talk about fraud – in an effort to distance themselves from fraud stories in the papers and also so as not to reveal the anti-fraud measures they have in place. But edeus’ managing director, Alan Cleary, reckons the mortgage industry is robust and well protected. “In-depth assessments are carried out by lenders on all new applicants, and the numerous safeguards and requirements that are in place ensure that fraudulent activity is kept to a minimum,” he says. “That said, there are instances of fraud and these could implicate any individual involved in the transaction – applicants, accountants, valuers, estate agents, staff or solicitors.”
The frauds that have recently come to light should be a wake up call for the mortgage industry and, now they are aware of how those frauds were perpetrated, the authorities and the industry need to take urgent action to prevent the same methods being used so easily again.
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