Remain vigilant to the signs of mortgage fraud

Put simply, mortgage fraud is any misrepresentation or omission of information, deliberate or otherwise, when applying for a mortgage. There are countless examples but in this article I'd like to look at four forms of mortgage fraud which are particularly common.

Buy-to-let fraud

Buy-to-let fraud has been
around almost since the buy-to-let mortgage was first introduced into the market in 1996. However, in recent years it's been flipped on its head.

Buy-to-let mortgages are traditionally more expensive than their residential counterparts and require larger deposits. As such, it is not uncommon to find some borrowers applying for a residential mortgage on a property despite having no intentions of living in it. In recent years, however, we're seeing the opposite occur.

Back in 2014 the Financial Conduct Authority (FCA) introduced new regulations following the publication of its mortgage market review (MMR). These fundamental changes to the market affected the way lenders assessed affordability.

As a result the criteria for many mortgages were tightened and the checks applicants had to go through became more stringent. Of course, the regulator's new rules could only apply to products that fell under its regulatory remit. As the buy-to-let sector is largely unregulated, the tighter controls do not apply. Suddenly these loans became more attractive than residential loans and we saw a rise in the number of mortgage applicants pretending to be landlords when, in fact, they were owner-occupiers.

Self-employed fraud

One of the most common forms of mortgage fraud occurs when an applicant makes false claims on an application about their income or employment status. Such fraud has risen considerably in recent years, according to information group Experian.

In the past, self-employed borrowers were able to secure
a mortgage by self-certifying their income, without providing documents evidencing it to
the lender. However, the MMR banned self-certification mortgages, with the controversial product cited
as playing a part in 2008's
credit crunch.

Self-employed borrowers were left with very few options when looking to borrow, as lenders implemented stricter checks and more detailed requirements. As a result, a number of self-employed borrowers have deliberately lied about their employment status on applications, claiming to be employees of their business rather than the owner.

Title fraud

Title fraud occurs when a mortgage applicant attempts
to borrow money against a property that they do not actually own. The applicant
then disappears with the
money, leaving the real homeowner owing thousands on a remortgage they did not take out.

This form of fraud that has seen the Land Registry pay out millions of pounds in compensation.

Stamp duty avoidance

Mortgage fraud is not restricted to the loan itself. One common form of fraud in property surrounds the avoidance of stamp duty - although not all cases of stamp duty avoidance are illegal.

Should a borrower deliberately mislead a lender
to avoid or pay less stamp duty, for example by lying about the use of the property, this would be fraudulent.

Of course, mortgage fraud is not restricted to the borrower. One recent case saw a London-based conveyancer jailed for over three years for cheating
his clients out of stamp duty.

The solicitor falsified the value of the properties his clients were purchasing on his paperwork, claiming they were cheaper than they actually were. When his clients paid the full stamp duty amount he pocketed the difference, to the tune of £353,500.

According to the FCA's thematic review of mortgage fraud against lenders, many lenders identified third parties such as solicitors, brokers and valuers as the main source of mortgage fraud risk. There are, of course, two different issues here: solicitors who intentionally commit fraud, as in the case above, and those who do so unintentionally. The latter often occurs when adequate due diligence is not carried out and checks are overlooked or missed. But incompetence is not an excuse, or at least not one that will wash with the regulators.

It is essential that solicitors are vigilant to the signs of possible fraud. With further regulation set to be introduced this month in the form of the EU Mortgage Credit Directive, the affordability criteria is set to be squeezed even further, and if getting a mortgage becomes more difficult one can safely assume mortgage fraud will continue to rise. SJ

David Gilman is a partner at Blacks Solicitors and head of Blacks Connect