Read more: http://www.propertyweek.com/story.asp?storycode=3148606#ixzz0Rp4BIlYB
Last month, Bradford & Bingley and Chelsea Building Society revealed they were making provisions for mortgage fraud – mainly related to buy-to-let mortgages – of £270.8m and £41m respectively (see box).
Other lenders are expected to announce their own losses but the full extent of the problem is not expected to emerge until next April when lenders report their full-year results.
Commercial lenders are expected to scrutinise their loan books for fraud too. A rise in interest rates and borrower defaults could reveal their exposure to the practice.
Even if property lawyers and surveyors have not committed fraud, in cases where a fellow adviser has, they could find themselves accused of negligence.
To recoup their losses, the banks are likely to pursue the property professionals – lawyers and surveyors – who were involved in setting up the mortgages. A wave of litigation is expected and the repercussions are already starting to be felt among thousands of sole practitioners, who are regarded as a higher risk (see box).
Unknown quantity
The scale of mortgage fraud is unknown. The Association of Chief Police Officers estimated last year it cost £700m each year. Simon Bevan, lead fraud partner at accountant BDO Stoy Hayward, believes the annual cost to the commercial sector is £5bn and to residential £1bn.
While some dispute these figures, Bevan argues that in the early 1990s there were cases in which lenders lost £100m to mortgage fraud in a single commercial property transaction. One Scandinavian bank, he says, fell victim to mortgage fraud that totalled £700m.
‘That gives you some sort of yardstick,’ says Bevan. ‘When you realise that one bank can lose £700m itself, you realise £5bn might be conservative.’
All lenders are expected to suffer because of the risky lending policies most pursued during the property boom that ended in summer 2007. In a rising market it is difficult to pick up the fraud because it is based on overvalued properties. When values begin to fall, the scale of the fraud becomes clear.
When lenders have looked through their books and found cases of fraud, they are expected to take action against advisers.
In some cases, accountants say valuers have been enticed to give a higher valuation with a payment for as little as £250. But even where there are no signs of deliberate value inflation, property professionals can be accused of negligence in not reporting the signs of mortgage fraud.
Jonathan Fowles, barrister at Serle Court Chambers, says lenders often choose to take action against advisers rather than the fraudster. ‘If you think you can go against a fraudster, you find out they’ve got no money or the money’s gone elsewhere. You find yourself pursuing a paper tiger and there’s no benefit in that.’
He says this could even lead to cases where home owners who have been defrauded find themselves battling against their mortgage lender – for example, when a fraudster takes out a mortgage on a property after obtaining its details through the Land Registry.
This means the mortgage lender loses the value of the mortgage, and the homeowner can lose out if the lender decides to pursue them for the value of the mortgage on their property.
Accountant KPMG has said there were 25 fraud cases worth £36m in 2008 – a tenfold increase on the £3.7m paid for 10 cases in 2007 – because fraudsters had taken advantage of holes in the mortgage system.
John Harding, partner at law firm Kingsley Napley, says it can take a long time for mortgage fraud case to get to court. ‘Typically, they start with a dawn raid on the various people concerned, all the papers collected, people are spoken to, and then the investigation carries on and can from six months to a year before they come to any charges.’
Before the court cases start, lenders need to find out what their exposure is to mortgage fraud. Then, the cost to the industry – and to its professionals – will become clearer.
Read more: http://www.propertyweek.com/story.asp?storycode=3148606#ixzz0Rp4kySSh
