THE true scale of the mortgage fraud committed during the housing market boom is only now becoming clear, according to fraud experts. However, the extent to which it has damaged lenders and the housing market will not come to light for some time as organised fraud continues to grow.
UK courts dealt with 25 mortgage fraud cases last year, worth a total 36 million compared with the 3.7 million of cases in 2007, according to KPMG Forensic's Fraud Barometer, which warned that most fraud committed since the credit crunch began has yet to reach the courts.
Hitesh Patel, fraud investigation partner at KPMG Forensic, said: "As the global economic downturn takes hold and organisations look ever more closely at their operations, it is very likely that more fraud will come to light so that the real impact of the credit crunch on fraud is yet to be fully felt."
In December the Professional Negligence Lawyers Association claimed there was "no doubt" that large-scale, organised mortgage fraud at least contributed to or may even had caused the property market meltdown.
The housing market downturn has uncovered the extent of the more opportunistic brand of mortgage fraud that's been going on for several years. Not only that, but as times have become leaner, banks can't afford to suffer fraud losses and are making bigger efforts to stamp it out.
The Financial Services Authority (FSA) believes the easy credit conditions of recent years and streamlined application processes, partly facilitated by the growth of so-called self-certification mortgages, contributed to the rise in mortgage fraud. Self-certification deals, which worked by allowing borrowers to vouch for their own earnings, were aimed at the self-employed and others with irregular incomes. Some borrowers and brokers took advantage of such relaxed processes by inflating the applicant's income to ensure they got a better mortgage, or one at all. Unsurprisingly, self-certification mortgages have virtually disappeared as lenders have tightened their practices and criteria.
"As long as the money was available on the money markets to feed mortgages, there was no pressure to look deeply into fraud," said Martin Moore, senior manager in the forensic team at PKF.
"Mortgages were so available and there was lots of money to give away so organised crime groups saw the opportunity and took advantage of it."
But with lenders increasingly risk averse, mortgage fraud is now less commonplace, believes June Hunter, senior manager for the forensic investigations team at BDO Stoy Hayward in Glasgow. "In recent years lenders have accepted information such as income levels without checking its accuracy, but now that people don't have the money to pay their mortgages, lenders are finding out," said Hunter. "This kind of mortgage fraud will become less common as banks will check applications more closely."
As unemployment rises, taking arrears and repossession numbers with it, the extent to which borrowers inflated their salaries to get mortgages will become increasingly clear. Those on lower incomes than they had previously declared will be among the first to struggle with repayments, although low interest rates may mean it is a few more months before the full picture becomes clear.
"With more people being made redundant and unable to pay their mortgages, it'll all come out of the woodwork in the next 12 to 18 months," said Moore.
Bernard Clarke, communications manager at the Council of Mortgage Lenders, said lenders, the government and the regulator were taking measures to combat mortgage fraud, such as the information sharing initiative announced last year. "Lenders have to remain vigilant and report suspected fraud and suspicions about potential sources of fraud," said Clarke. "The vast majority of brokers are making perfectly honest applications but there's a small number who may be involved in criminal action and that's what the sharing initiative is designed to detect."
Mortgage fraud increasingly describes more sophisticated arrangements, however. Some brokers have been involved in scams where false surveys with inflated valuations have been submitted to lenders by fictitious mortgage applicants. Through various methods, lenders have been duped into advancing more money than a property is worth and the situation only comes to light when the "buyer" defaults on mortgage payments and has disappeared. The lender is then forced to repossess a property worth considerably less than the mortgage.
Hunter believes this kind of fraud could increase as the more opportunistic version becomes harder to get away with. "There are sophisticated syndicates that target large-scale renovations or new developments and organise mortgage funding for several properties at a time, often under a fictional corporate or individual identity," explained Hunter. "Only when the mortgage provider seeks repossession because mortgage payments were not made does the fraud come to light."