With property values expected to fall over the near term, lenders are re-evaluating their risk management procedures with regard to over-valuation and fraud.
During the market crash in the early 1990s, the number of mortgage-related frauds increased dramatically and now legal professionals are warning of a similar rise in fraud cases as the UK property market continues to slow.
In the past few months, some high-profile cases have started to make the headlines. One example involved a scam in south London that resulted in four mortgage firms losing an estimated £40m after it was discovered that mortgage applications for new apartments in Thamesmead were bogus.
The Metropolitan Police arrested 11 people. It had been identified that a property development firm bought 84 apartments at a highly discounted price and was then selling them on at inflated rates and pocketing the difference.
In addition, false identities had been used on applications, as well as real identities from ‘mortgage mules’ – members of the public who allow their names to be used for a payment.
Such crime syndicates are raising fears across the industry that the market could become unstable as multi-million pound mortgage fraud cases are unearthed.
The BBC’s Panorama also aired a programme in the autumn which focused on several instances of mortgage-related fraud in the sub-prime or adverse credit markets.
More recently there have been news reports of a mortgage broker that has been banned by the Financial Services Authority for submitting at least 22 falsified mortgage applications.
The full effects of mortgage fraud can create a negative impact on the economy in general, as it makes the housing market become more volatile. If interest rates rise quickly, repayments can be-come unaffordable for people who have stretched themselves through a fraudulent self-certification mortgage.
This could lead to an increasing number of defaults, which in turn could create a further fall in house prices.
In a tightening market, as exists today, these types of circumstances are likely to rise. This makes it an important time for mortgage lenders to be extra vigilant and to perhaps consider new ways to scrutinise mortgage applications before they are approved.
Currently, thorough personal identity and credit checks are done through firms such as Experian. These ensure that individuals applying for a mortgage are who they say they are. The checks also confirm whether the applicants have a good credit record that satisfies the needs of the lenders.
Credit checks do not, however, take into consideration other factors, such as the quality of the valuation or the potential for a covert buy-to-let application. At Quest, we have identified a new approach that adds a further layer of security to the approval process. It can offer the lending community an additional safeguard at the point of valuation, once the initial personal checks have been done.
The amount of data that is now held by computers and their ability to pattern match can substantially assist in the audit and monitoring process that is critical to combating fraud. The use of intelligent data analysis tools can help drive down incidents of property and mortgage-related fraud by identifying potential issues that need to be looked at in greater detail.
Technology can now be directed at identifying potential fraud at the mortgage valuation stage of individuals’ applications.
Using historical data of past valuation reports which are stored in a machine-readable electronic format, technology is able to identify patterns through analysing data in vast quan-tities.
The system takes into consideration information such as the names of applicants, mobile phone numbers, distance between the applicants and the properties they are interested in, to name just a few factors.
Using such information, it is possible to identify whether an applicant al-ready has a mortgage and is applying for a second or third one.
Alarm bells would ring, for example, if an applicant’s contact number is the same as that of an existing customer with a different name. Maybe the distance between an applicant and the property in question is more than 100 miles. This would raise the question as to whether an application for a standard mortgage is in fact for a buy-to-let property.
The list could go on. However, applying data analysis at this point could ‘red flag’ potential questions that the lender can asked before the application is processed.
The technology can also be used to analyse the work of mortgage valuers, brokers, estate agents or third parties to identify any applications that appear to have substantially overvalued a property. Using historic mortgage valuations and linking in the current Land Registry price comparables, the system can add another red flag to alert the lender of a potential mismatch requiring further questions to be asked before the application is processed.
Another area where technology can help is in identifying whether paper-based mortgage valuations posted back to lenders have been manually ‘improved’ beyond the acceptable risk profile for their clients by brokers in order to get the cases through.
This has been known to happen over the years and now, using the technology, ‘locked’ electronic copies of mortgage valuation reports can also be sent directly to lenders, which can be used for verification purposes.
As use of the technology advances across lenders, security will become even tighter as the system will be able to analyse real-time and historic data from across multiple lenders.
This cross-industry analysis will provide a more complete picture of the activities of applicants, brokers, valuers and other third-parties, which can be fully scrutinised and questioned.
Coupled with a property identity database, we believe this technology creates a complementary process to Hunter and the major credit check agencies involved in combating mortgage fraud, along with the initiatives by the FSA and Council of Mortgage Lenders.
Help from technologys
The Quest technology adds an additional layer of security to the current mortgage application process. By using intelligent data analysis and pattern-matching techniques of mortgage valuation data, it can quickly flag up any potential risks, errors or questions, including:
- if the valuation appears to be abnormally high, based on past valuation reports and Land Registry price comparables; and
- if any one particular broker, valuer or estate agent combination appears to be consistently over-valuing (compared with Land Registry and AVM data).
The solution can also spot if there is a sudden burst of mortgage application activity in specific areas or through certain brokers, such as:
- if multiple applications are being processed for one individual;
- if there is a particular unusual circumstance – for example. the property is located over 75 miles away from applicant, suggesting the mortgage application could potentially be for a buy- to-let;
- if multiple applications have different applicant names but use the same telephone or mobile number;
- potential misrepresentation of new build properties;
- anything ‘out of the ordinary’ or that breaks from the usual historical patterns; and
- known problem addresses, such as specific new developments where over valuations have been known to take place – for example, the Thamesmead development.
Importantly, any indicators returned to the lender or passed to the valuer are anonymous and are designed to flag suspicious behaviour without compromising lenders’ confidential information.
Quest believes that adding this further layer of security checking to the mortgage process could reduce the number of fraudulent cases, as potential fraudsters become aware that stringent analysis is taking place on all mortgage applications.
Extent of the mortgage fraud
For obvious reasons lenders tend to talk down the size of the problem, while the police tend to talk it up – sometimes it is said to secure more resources.
But one thing is certain – in a bullish housing market fraud tends to become invisible. But in bearish times with fewer transactions and perhaps falling house prices, the problem appears to re-appear again.
Thus it came to light in February that some 200 brokers were under investigation by the Financial Services Authority in connection with mortgage fraud.
According to Richard Farr, director of the Association of Mortgage Intermediaries, 200 brokers represent about 0.66% of the mortgage intermediary community, so that means 99.4% are doing right by their client.
It is an interesting point, but those few bad apples for which Farr subsequently applauded the FSA for driving out of the basket, were in a position to write a lot of fraudulent business. A more recent report by the Association of Chief Police Officers even suggested that terrorists and criminals were conning British banks out of £700m a year to help finance their illegal activities. But it conceded that the figure was an estimate.
The report claimed that organised crime groups used mortgage fraud to generate income and launder money from the proceeds of their operations, such as human and drugs and trafficking and prostitution.
“While there is no evidence to suggest mortgage fraud directly funds terrorist acts, this area of criminality has been encountered during investigations into UK-based terrorist groups,” it stated. “Mortgage fraud can be used to finance infrastructure including safe houses.” The average cost of each fraud to a lender is estimated to be around £45,000.