The quantity of mortgage fraud cases being uncovered by lenders and their solicitors has  increased significantly in the last couple of years. Mortgage fraud has flourished at a rate exceeding even that of the mid-1990s. Recent research found that mortgage fraud could  total £1.2 billion in 2010 and we are seeing more and more professionals complicit in  fraud.

 

Whilst the property market was rising more opportunity was available for negligent and  deliberate over or under valuations, undisclosed incentives, direct deposits and back-to-back sales to go through without being detected.

 

The increase in buy-to-let  mortgages and new-build flats provided fertile ground for the mortgage fraudster and given  the growth in this market over the last ten years, the level of mortgage fraud yet to be  identified in this area is likely to increase substantially.

 

The recent downturn has reduced the immediate opportunities available for the fraudster as  there has been a significant reduction of available, easier to target, sub-prime,  buy-to-let and self-certification mortgages.  

 

With increasing levels of existing fraud  being uncovered, the current priority for lenders, however, has to be to go through the  mortgage back book in order to identify charges which have not been registered and which  ultimately may have been the subject of fraud. It remains a massive risk issue and the  earlier fraud is spotted the more chance there is of recovery.

 

Following a systematic review of the mortgage book, Bradford & Bingley announced that it is  taking a £388 million hit due to potential losses from fraud and professional negligence.

 

The fight against fraud is picking up speed; the National Fraud Authority (NFA) has claimed  that increased vigilance had prevented £130 million of fraud being committed during the  last 12 months and lenders are now placing far greater emphasis on fraud prevention, and  detection in addition to recovery.

 

Last month four men were jailed for deceiving HBOS and Abbey for in the region of £8  million after they bombarded the lenders with false mortgage applications.  More cases are  likely to be hot on the heels of this one; the City of London Police alone is currently  working on 15 separate investigations into organised mortgage fraud networks.

 

The recent announcement from the NFA that stakeholders in the mortgage industry are coming  together to establish a forum to tackle fraud is welcome news and this joined up approach  should help in future prevention. The Land Registry is also investing in anti-fraud  training, new systems and is also taking on new staff. Recent estimates show that these  initiatives have prevented around £20 million of mortgage fraud which would not otherwise  have been picked up.

 

The Solicitors Regulation Authority (SRA) has also stepped up its fight against solicitor  involvement in fraud through new appointments to its investigative team and by a concerted programme of investigation. Some 106 firms were investigated by the SRA last year as part  of this clamp down, resulting in the closure of 22 firms, and the referral of 26 firms to  the police. While fraud detection is a key priority, so is fraud prevention, and SRA  estimates that its activities have saved lenders somewhere in the region of £15-20 million.

 

The residential mortgage market is not the only one to have been blighted by fraud; the  commercial property sector has also been hit. One of the few recent court decisions arising  from a lender professional negligence claim (Nationwide v Dunlop Haywards) dealt with a  commercial property fraudulently valued at £11.5 million at a time when it was actually  worth only £1.5 million. Losses suffered on commercial loans also need to be reviewed by  lenders with a view to identifying potential recovery actions.

 

 

From a lender perspective a holistic approach needs to be taken to fraud, including sharing  fraud data with other businesses and ensuring that robust controls are in place across  their own business. Too often, cases are still not being reported to the regulatory  authorities, including the SRA and SOCA – which would help in the crack down on organised  fraud networks.

 

Lenders fraud detection systems are increasingly coming under greater scrutiny. Following  the conviction in March of a gang who defrauded lenders of £6 million, the FSA announced  plans to visit lenders over the next few months to check that lenders systems are robust  enough to detect fraud.

 

The most common type of mortgage application fraud committed in 2009 was the supply of  false documentation, accounting for 33 per cent of mortgage fraud cases. But the majority  of cases we are seeing come to light are not straightforward examples of professionals complicit in fraudulent activity. Some 80 per cent of cases against solicitors are based on  failure to report matters, which would have affected the decision to lend, such as  notification of direct deposits, incentives or subsales.

 

A further 10 per cent are title  problems, which have been overlooked, such as no rights of way, or lack of planning  permission. Only 10 per cent appear at this stage to be down to straight fraud, where the solicitor never had any intention of registering a charge.

 

There has also been a big increase in the involvement of intermediaries in mortgage fraud.  There are various signs that can indicate that fraudulent activity is taking place  including; the provision of false income and employment details; cases where all the borrowers from a particular broker immediately go into arrears; links between different  mortgage applicants with a particular broker; applications cancelled when further  information or documentation is requested; and also unusual trends.

 

Lenders are increasingly raising concerns that some intermediaries have been complicit in  mortgage fraud. We are now being asked by lenders to look at the involvement of the  intermediaries in the lending and to consider the potential for pursuing them. Each case  has to be looked at on its own merits, but there is the potential to pursue the  intermediaries involved.

 

Of equal significance though is the reporting of findings to the Financial Services  Authority under the information from lenders scheme (IFL). Lenders need to ensure that  those involved in the fraud are taken out of circulation. This is the voluntary provision  of information where fraud is suspected.

 

So far over 30 lenders have submitted in excess of  300 reports to the FSA. This has resulted in a number of brokers having their authorisation  suspended or withdrawn.

 

As well as understanding cases already on the books, there are new avenues constantly  opening for fraudsters and so new areas of concern for lenders. Research by Experian last  month found that the next prime target for fraudsters would be new build locations with  large rental sectors.

 

 

Recently we have seen consolidation of the residential property market – out of the 8,000  legal firms, 60 per cent of the work is now conducted by around 760 firms, and this  consolidation is set to snowball as lenders look to reduce the number of firms on their  panels to reduce risk.

 

From a lenders perspective, they need a cost-effective professional negligence service to  maximise available recoveries, but they should also look to reduce exposure from the outset  by limiting the number of firms on their conveyancing panels. In some instances, lenders  are even looking to outsource management of their own solicitor panels to particular legal  firms.

 

A select solicitors' panel for remortgage work has proved to be a remarkable success for  lenders, resulting in reduced completion timescales, reduced fees, reduced risk and an  excellent customer experience.

 

Conveyancing lawyers historically have put individual  client’s legal interests ahead of the lender and not afforded them the same level of  protection. The logical way forward is for lenders to reduce their panel and by doing this  help to redress the balance.

 

The reality is that this area of fraud has, by and large, remained untouched for some  years, but there is now an eagerness to revise terms and conditions to provide lenders with  more robust rights, if intervention in the legal firm is ultimately required.

 

Delays in deeds or registration of charges tend to be the first clear indication that there  may be a more serious underlying issue. So, in addition to lenders rights being expanded to permit visits and the production of appropriate certificates or policies on demand, where  deeds or registration of charges have been outstanding for over a stated period, there is  now likely to be an obligation on the firm to pay for any internal administration costs and  also any costs associated with the lender having to engage any further legal resource to  rectify particular issues. In addition, agreements now tend to incorporate a period review  and a clear indication of the procedure for termination.

 

Mortgage intermediaries can expect greater regulatory scrutiny as the FSA and law  enforcement agencies target those who ignore the potential for their firms to be used as an  integral part of mortgage fraud.

 

The reduction of financial crime is one of the FSA’s four  statutory objectives and it is likely that the FSA will be looking to come down hard on  those intermediaries assisting fraud. A thematic review is underway with results  anticipated in January 2011, but we have already seen the FSA identify inadequate  anti-fraud systems and controls to identify mortgage fraud, as one of five key risks to the  intermediary sector.

 

Intermediaries who are involved in mortgage fraud can expect  intervention from the FSA and law enforcement agencies and can also expect to face  increasing levels of claims from lenders who have been targeted by fraudsters with  assistance from intermediaries.

 

Valuers too have seen a sharp rise in claims by lenders, and the high level of new  notifications shows little sign of abating. We have already seen some valuers’ firms go  into insolvency as a result of the levels of claims against them, and it is rumoured that  there are other firms in difficulty.

 

It is inevitable that there will be further casualties of the swell in mortgage fraud.  Detection and prevention of fraud are unfortunately only two aspects of the problem and to  some extent, the new measures now being put in place are a case of shutting the stable door  long after the horse has bolted.

 

The third and most problematic aspect of the issue is  recovery of losses sustained – ‘following the money’ becomes increasingly difficult as time  passes and the recent developments with Quinn Insurance demonstrate that even where  evidence proves that a lender’s professional advisor was involved in a fraud, there are no  guarantees that the lender will not still be left footing the bill.