As technology continues to evolve, so too does mortgage fraud. Brokers can lead the fightback by staying alert and using the same new technology to check their clients’ profiles
Lenders identified fraudulent mortgage applications totalling nearly £1bn last year – but this could be just the tip of the iceberg, according to data compiled by Mortgage Strategy.
Statistics on fraud can be hard to come by because many lenders and brokers do not want to alert criminals to their preventative measures. But Mortgage Strategy used publicly available figures from a variety of sources – on fraud levels, housing transactions and mortgage sizes – to determine the approximate value of fraudulently obtained mortgages in 2015, the first full post-MMR year.
Data from Experian shows mortgages to be the second most-targeted product for fraud last year behind current-account fraud. During Q2 2015, 70 mortgage applications in every 10,000 were found to be fraudulent. That figure crept up to 72 cases per 10,000 during Q3, rising again in Q4, by 15 per cent, to 83 cases per 10,000.
Although that number is the same as in Q4 2014, it had fallen sharply at the start of 2015 before growing steadily in the final six months.
Until February last year, mortgage fraud had been the most common type of fraud within financial services for three consecutive years. It was then overtaken by current-account fraud, which has surged in the past 12 months.
According to Council of Mortgage Lenders statistics, 1.2 million property transactions were conducted in the UK last year. Nationwide estimates that 38 per cent of homes purchased in Q1 2015 were paid for in cash. This means that an average of 62,000 mortgages a month were taken out last year.
Using the Experian average for 2015 of 77 detected frauds per 10,000 applications, there were therefore around 5,730 attempts at mortgage fraud during the entire year.
With the average new-buyer mortgage estimated at £167,000 by the British Bankers’ Association (2014 figures), those fraudulent applications were worth a total of around £950m. That compares to £1.2bn of fraudulent cases in 2014, representing a fall in total value last year of around a fifth.
So who are these fraudsters and what are their backgrounds? While some may be career criminals, many are one-time mortgage cheats adjusting their application documents to boost their loan. For example, Experian data shows that 96 per cent of all attempted mortgage fraud in 2015 was the result of first-party fraud, where applicants had falsified information on their documentation.
Experian director of identity and fraud solutions Nick Mothershaw says: “This is fraud committed by genuine individuals attempting to bend the truth on their mortgage applications.
“Around 4 per cent of all the mortgage application fraud that we detect is related to third-party fraud – usually where the details of genuine individuals are being used fraudulently, through either stolen personal data or the hijacking of existing accounts. This is a very complex kind of fraud to execute, so we don’t see nearly as much of it, but the values involved are typically much higher.”
Over the past three years, urban renters in social housing experienced the biggest increase in mortgage fraud, with a 25 per cent rise, albeit the group’s share of all mortgage fraud was just 7 per cent.
Mothershaw says: “Multicultural extended families living in city suburbs tend to be the biggest victims of third-party mortgage fraud. This ‘urban cohesion’ accounts for 22 per cent of all mortgage fraud victims, followed by young people renting privately, often in urban locations.
These ‘rental hubs’ account for 11.4 per cent of victims. “However, over the past year fraudsters have increasingly targeted the older generation. These are elderly singles or couples who own their homes – the ‘senior security’ group – and they have experienced an increase from 1.71 per cent to 4.66 per cent of all victims of mortgage fraud.”
Types of fraud
According to Experian, the main type of third-party mortgage fraud is committed by someone using fake details to obtain a mortgage on a property that does not exist or that they do not intend to buy. These scams usually involve a third party, such as a conveyancer or agent.
There are also ‘phishing’ scams, where fraudsters target someone selling their house. They acquire information about the purchaser, their conveyancer and the transaction itself.
They may find this out either through collusion with a third party or as a result of cybercrime, such as a hacked database or intercepted emails.
The fraudster contacts the purchaser and masquerades as their solicitor, requesting a change to the bank account into which the deposit is to be paid. “The email will look genuine and the person who accepts the request will have no reason to believe otherwise,” says Mothershaw.
“After all, who would actually know which solicitor they were using to buy their house? The fraudster will have successfully directed the payments to an alternative account and then disappeared with the money.”
Mothershaw describes other fraud cases where advisers have had their emails intercepted or hacked and received messages supposedly from people they have dealt with before, expressing interest in a new mortgage.
Another type of scam is where fraudsters find out about rented properties that have no mortgage attached to them. They obtain the owner’s details from the Land Registry and apply for a mortgage in the landlord’s name. The landlord subsequently discovers he or she is liable for a mortgage, while the fraudster has disappeared.
Suspicion of fraudulent activity on the part of a client is the most common reason for broker expulsion from lender panels. It is therefore crucial that brokers become familiar with their client’s personal information and circumstances before approaching a lender on their behalf.
Client documentation must be verified thoroughly and experts say it is important for brokers to be alert to all parts of the mortgage chain and to communicate clearly.
London & Country product manager Peter Gettins says: “Most fraud cases involve some level of collusion from multiple parties. Hence things like independent valuations and minimum standards for conveyancing firms are so important. Likewise, it’s crucial that all parties have clear and honest communication throughout, raising any concerns early and working closely together.”
Regulators, of course, keep a close eye on fraud prevention measures across the industry. In 2008 the former Financial Services Authority launched its Information From Lenders scheme to enable lenders to inform it when they suspected intermediaries of being engaged in fraud.
The regulator claims the IFL scheme has been successful but declines to provide up-to-date information. In 2012 it said the scheme had generated 700 alerts about mortgage intermediaries, with 100 enforcement cases opened and 80 brokers banned, and fines totalling more than £1m.
The FCA says all lenders should have robust and proportionate resources, systems and controls in place for the detection, identification and prevention of mortgage fraud. All senior management teams should be responsible for managing fraud risks – overseeing, owning and regularly reviewing the control framework’s effectiveness.
Beyond the IFL scheme, the Mortgage Market Review has revolutionised property finance and made it harder to engage in more casual fraud, such as inflated incomes. The MMR introduced income verification on all mortgage deals, bringing an end to the slack regime of self-certification, or ‘liar loans’.
But some argue that, while the MMR has solved one major problem, it has created others, such as the move to buy-to-let ‘gaming’. This involves a first-time buyer, for example, using an unregulated buy-to-let mortgage to get around tough affordability rules.
In August 2014 the FCA said it was concerned about the growth of buy-to-let gaming since the implementation of the MMR, with brokers noting the increased prevalence of the practice.
The regulator said: “Some borrowers who are constrained by the flow limit might be encouraged to make fraudulent applications for buy-to-let mortgages. Given the severe penalties associated with mortgage fraud, we do not anticipate that this will become a material point of leakage but we expect firms to ensure that application verification procedures for buy-to-let products are robust.”
Data on buy-to-let gaming is scarce, but many brokers report concern about its growth. Gettins says: “While the MMR codified income verification, much of it had already been implemented
by lenders following the credit crunch. Self-certification, for example, was long gone by the time the MMR specifically outlawed it.
“However, bringing in stricter income assessments created, for some, an incentive to try to get around them – perhaps the most obvious candidate being the attempt to get a buy-to-let loan instead of a residential one, thereby avoiding the standard affordability test. And lenders are acutely aware of this.”
As technology continues to evolve, so too does mortgage fraud. Despite schemes such as the IFL, and sweeping regulations to crack down on liar loans, it remains a large, £1bn threat to the industry – one to which brokers must remain alert.
High-profile mortgage fraud cases
A conveyancer was jailed for over three years after he lied to manipulate the amount owed by clients in stamp duty land tax. Anthony Maragh, from Harrow, withheld almost £352,500 from HM Revenue & Customs by lying in the paperwork to undervalue his clients’ properties. Maragh charged clients the full amount and kept the difference. Between 2008 and 2013 he under-declared stamp duty on 43 property transactions. Money was transferred into his personal bank account and used on antique Chinese gold bonds.
A London mortgage broker who lied about his company’s profits to evade paying £115,000 in corporation tax was found guilty of tax and mortgage fraud. HMRC found that Asim Hussain, a director of Lifestyle Mortgages (Middlesex), had diverted company income into other bank accounts to reduce his company’s profits and pay less tax. Hussain subsequently used the money to finance a property in Dubai, overpay on his mortgage and buy land for investment purposes.
A former Virgin Atlantic pilot was jailed for 14 years after posing as a property developer in a £30m mortgage fraud. Mark Entwistle, 47, Iived a lavish lifestyle, spending money at casinos in Las Vegas and owning a luxury boat. Southwark Crown Court heard he used corrupt solicitors and accountants to approve his loan applications. Two solicitors and an accountant were also jailed for fraud.
A property buyer convicted for his role in a £2.5m mortgage fraud was ordered to pay £110,690 under the Proceeds of Crime Act. Jason Omar, 43, had been sentenced in April to two-and-a-half years’ imprisonment after Teesside Crown Court found him guilty of using fraudulent methods to obtain £2.5m in mortgage finance to purchase properties in Middlesbrough worth around £1.5m. Omar was found to have lied about the level and source of his own income as well as about the purchase price of the properties in question.
A former chartered surveyor jailed for his role in a £50m mortgage fraud paid an overdue confiscation order of £1.5m plus interest. Ian McGarry had been sentenced to six-and-a-half years’ imprisonment in June 2011 after pleading guilty to two counts of conspiracy to obtain money transfers by deception and four counts of obtaining a money transfer by deception. At the time of sentencing, McGarry was ordered to pay a confiscation order amounting to £1.55m. He exceeded the time to pay permitted by the convicting judge and, as a result, had to pay an additional £157,343 in accrued interest.
Criminals are changing their fraud focus
Antony Lark, Managing director, Just Mortgages
Mortgage fraud has proved a resilient threat that has been building with renewed energy and severity since the pre-2007 lending boom.
Criminals have changed their focus in recent years, in both opportunistic and large-scale mortgage fraud.
As underwriting and lender criteria have gradually tightened, increasing scheme abuse has resulted. For example, clients who cannot get approval for a residential mortgage due to affordability issues may decide to apply for a buy-to-let mortgage.
The buy-to-let sector is particularly susceptible to mortgage fraud in relation to large-scale renovation projects and new-build apartments, where criminal organisations are sometimes involved in the purchase of such complexes.
We are also seeing a significant increase in self-employed clients who claim to have become employed three months earlier, providing fraudulent payslips and bank statements to support this.
So what should mortgage brokers look out for? Close scrutiny of bank statements and payslips is essential. They should also obtain six months’ worth of documents because fraudsters are becoming more aware that they will be asked for three months’ worth of bank statements and payslips and they often prepare for this by setting up false salary credits. If clients are suddenly asked to supply a previous three months’ worth of documents, fraudsters will be unable to provide them.
It is all about knowing your customer. For example, is it realistic that a family of five that lives in a four-bedroomed detached house is moving to a two-bedroomed flat?
A common-sense approach should be taken and brokers should check out the employer on Companies House to ensure they exist and their business premises look genuine.
In terms of the MMR, I do not think it has managed to stop the so-called ‘soft’ fraud of inflated incomes, although this is not as prevalent as it once was. The fact that one must now provide evidence of income will have put a lot of people off.
Mortgage fraud is expensive, widespread and elusive, and it clearly remains an issue for the industry, with increasing levels of innovation from fraudsters. Therefore the need for increased vigilance around fraud monitoring and prevention is more important than ever.
Lenders must continue to apply the best-possible systems with enhanced controls and detection methods in order to create a robust defence, while also aiding prevention and learning lessons from the past.
The changing role of brokers in tackling mortgage fraud
Much has changed for brokers in the past 10 years in terms of confronting mortgage fraud.
A decade ago, fraud prevention was regarded as the responsibility of the lender. Brokers would often collect just the minimum number of documents acceptable to the lender, without applying any scrutiny or questioning whether they were consistent with the information given by the client.
There was also little engagement from lenders on the matter of financial crime prevention – they liked to keep their cards close to their chest.
Now the world is a very different place. The broker is the first line of defence against mortgage fraud. Both lenders and the regulator rightly expect brokers to have strong processes in place to prevent themselves from being used as a route to commit fraud.
Every broker therefore has an obligation to keep their knowledge on fraud identification up to date.
As a network, we too must keep advisers well informed and have robust processes in place to assist them in spotting potential ‘bad cases’, as well as deter fraudsters from using our advisers.
It may seem obvious but a simple glance at the details on documents, comparing them with those on other documents or with what the client has told you, can be very revealing. Normally the net pay shown on a payslip matches the amount received in the bank account so, if there is a discrepancy between the payslip and the client’s bank statement (even if only a few pence), an alarm bell should be ringing.
Bank statements can provide an insight into a client’s life – revealing credit commitments, bills paid and other mortgages, and where and how the client spends their money. This can help uncover information that is not consistent with the client’s story.
Scheme abuse has become more common, with fraudsters applying for a buy-to-let mortgage on a residential property to avoid more stringent underwriting. Common sense is the adviser’s main tool in spotting this – questioning the location of the mortgaged property as well as the type and size may raise concerns. For example, it would be unusual for a client to remain living in a two-bed terraced house while owning a four-bed detached rental property – albeit this should be measured against the client’s circumstances.
Online resources are also useful for performing checks on clients. Looking at details on Companies House, LinkedIn, Zoopla or Facebook can help to substantiate a client’s story.
Knowing your client’s profile, checking it carefully against the documents they provide and not being afraid to question them about anything unusual are all good foundations for spotting fraud.
AR firms should be confident in asking their network for a second opinion if something in a client’s application does not feel right.