It seems that crime really doesn’t pay.

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“Banks are seeking to crack down on mortgage fraud as evidence mounts of a rise in the  number of fraudulent borrowers,” reported Ellen Kelleher in the FT this weekend, citing  several high street banks, who claim they’ve had to tighten lending controls in response to  a large rise in the number of “potentially fraudulent mortgage applications”.

We don’t know why they’re so worried. These people clearly aren’t criminal masterminds.  After all, you’d have to be a pretty stupid fraudster to be attempting to climb onto the  property ladder now, just as it’s collapsing under its own weight.

All the same, it’s strange that after a decade-long boom in house prices, it’s only just  now that banks are starting to find that fraudulent claims are rising.

It’s almost as though they’ve only just started looking…

Experts claim that cases of mortgage fraud have risen sharply this year. Nigel Moden, Ernst  & Young’s director of mortgage lending advisory, tells the FT: “There is growing evidence  to suggest that the credit crunch and the increasing sophistication of fraud networks are  requiring lenders to be ever more vigilant across all their mortgage businesses.”

It really is quite astonishing. After all, we’ve had a massive housing boom, fuelled by  incredibly clever and innovative forms of credit that allowed people who’d never had access  to mortgages before to sign off on their own income details.

Ever-rising house prices have created huge incentives for people to, shall we say,  exaggerate their personal circumstances in order to make what seemed like a fast return on  the property market.

Even normally honest people, desperate to buy a house and stop “wasting money” on rent,  might have been tempted to bump up their wage packets a little on the application forms.

And yet it’s only now, as prices are collapsing and transactions are drying up, that  financial institutions are discovering rising cases of potential fraud.

Hmmm. Are you thinking what I’m thinking?

The truth, of course, is that banks are only ‘discovering’ mortgage fraud now, because they  need excuses to knock back as many mortgage applications as they possibly can. Up until  now, they haven’t cared who they lend to, because there was always a willing buyer for the  mortgage, regardless of how badly vetted it was. That market disappeared when the US  subprime crisis finally exploded.

So now banks are worried that they’ve been left holding a whole great pile of  mortgage-backed dynamite, relying on over-stretched borrowers to maintain payments they  can’t afford, on collateral that is losing value by the day.

Lenders focus on quality, not quantity

That means – as we’ve been saying for a while now – that banks are now chasing profitable  customers, rather than market share. The focus is back on quality, not quantity. And it’s  amazing how when a credit crunch arrives, what was once seen as something that was OK  because everyone was doing it (giving yourself a pay rise or an extra nought on your bonus  to stretch your multiples that little bit further), becomes plain old fraud.

Way back in October 2003, the BBC’s Money Programme uncovered plenty of examples of  mortgage brokers more than happy to recommend that clients overstate their income. And  earlier this year the FSA discovered in a review of lenders and brokers that in a third of  cases, checks on ability to repay the mortgage were “inadequate”.

So fraud cases aren’t rising at all – it’s just that banks are only now finally making any  effort to detect them. The FT continues, “lenders now require brokers to introduce  ‘plausibility checks’ before agreeing self-certified mortgage applications, which do not  require borrowers to offer proof of income.”

Meanwhile, Ian Clegg of mortgage broker Clegg Gifford Private Clients tells the paper that  “banks are now trying to ward off fraud before it happens.” Meanwhile, Stephen Bland, who  deals with mortgage fraud investigations at the Financial Services Authority, says that  “next year we’re going to take a more proactive stance on [mortgage fraud].”

Needless to say, it's far too late. There’s been much slamming of stable doors since the  credit crunch hit the headlines in August, but this lot take the biscuit. The horses all  bolted long ago and are now stampeding right over the edge of a cliff.

Only a miracle can save the housing market now

The latest gloomy forecast to come out about house prices is from Citigroup, which reckons  that prices will fall by 10% over the next three years. And I’d say that’s optimistic.

All those lending practices that the banks had been turning a blind eye to are about to  bite them in the backside. Just as the supply of credit that has fuelled this housing  bubble is being turned off, so banks and regulators are making sure that any money left  available for lending will be almost impossible – relatively speaking, anyway – to get hold  of.

Forget interest rate cuts and liquidity injections – it’d take a miracle to save the housing market now.