French immunity
Mortgage fraud is the plague of all British lenders. So why do the French seem immune to it, asks David Bailey, SGH partner and head of services to lenders group?
I was so intrigued by yet another example of how the French manage to get away with something that we all have to put up with – that I took the opportunity of a recent visit to the Aquitaine region of France to interview the regional “Directeur” of the “Banque Postale”, the oldest mortgage lender in France.
As soon as I mention “mortgage fraud”, Monsieur le Directeur looks puzzled. “What fraud?” he enquires politely. I outline a typical scheme. He is looking even more puzzled: “I have worked for the Banque for over 30 years and I have never come across any of that. There have been a handful of applications that we rejected because we suspected that the income had been inflated, but that’s it. And what would be the point of that, anyway? Why pay inflated monthly repayments for a little extra cash at the start? And the lawyer, the “notaire” would have to be in on it, which is simply impossible.”
As I sit there pondering over his reaction, the embryo of some rather disturbing truths starts dawning on me. Feeling a tad befuddled, I decide to address the least unsettling first; I explain that such scams would often rely on the idea that repayments would quickly stop, the house would be repossessed and that is when the disgruntled lender would realise that everyone else has pocketed the extra cash. Monsieur le Directeur is clearly starting to suspect that I am making it all up.
Affordability
“Repossessions? We hardly ever do that. In my time here, it’s happened once. We always try to find another solution. That would be a last resort. You anglo-saxons are so cynical, you lend to anyone in the knowledge that you will repossess if it goes wrong.”
As I mentally note with some amusement that he is starting to sound like an excerpt from the mortgage market review, he goes on to clarify: “Nowadays, anyway, we hardly ever take a mortgage to guarantee a loan. If the application was such that we felt a mortgage was needed, then we would just not lend. We assess the individual repayment ability of the borrower; we don’t just look at their income and tax returns. So even if their total debt is below the 35 per cent debt to income legal ratio (33 per cent residential loan to income), we also go through all their bank statements to work out their personal spending habits. Then, if we feel it is feasible, we use the ‘Crédit Logement’, an organisation created by the equivalent of the Council of Mortgage Lenders or the British Bankers Association, which acts as guarantor. The first thing we do if someone defaults, we seize their income. That is more of a deterrent. People may be prepared to lose their house but not their salary!” Who is being cynical now?
Lawyers
As our conversation goes on, it becomes disconcertingly apparent that our universal panacea, the “mortgage”, may in fact be the source of much evil. But I need to address another (personally) distressing fact: are English lawyers fundamentally and globally so much more corrupt that they make the whole debacle possible? Monsieur le Directeur reassures me: “Our notaires have no choice, the funds they receive from a sale go straight to the Caisse des Dépots et Consignations. Short of physically running away with the funds, they can’t do very much – so they wouldn’t bother for such relatively small sums.”
So, it sounds as if the French system is not just about infantilising borrowers (which Monsieur le Directeur tenderly calls ‘maternage’), it also treats professionals like wayward teenagers who need a firm hand to keep them out of trouble.
“What about valuations?” I suddenly ask, realising that we have not yet mentioned the third coordinate of the fraud triangle. “We do send experts when we have a doubt, but it is rare. We usually have some idea of the value.”
Since personal deposits are usually very high (and paradoxically even higher for those on a lower income), valuations are certainly less crucial than in the UK.
Culture
It still does not completely make sense to me but as I keep questioning, I realise that, perhaps, the major difference is – that old cliché again - cultural. There are less residential loans in France because real estate ownership is not seen as such a fundamental right. No political party has ever used the notion of “access to property” as a campaign promise. Rents are globally cheaper than residential loan repayments, tenants are incredibly protected under the “Loi Mermaz”, and social benefits are such that, for example, a family on an income of £25K will often have their rent paid by the “Allocations Logement”, making ownership look like a bad deal.
We indulge in a few minutes of banter over those cultural differences, an old favourite of any anglo-french conversation and, inevitably, we touch upon the draft Directive Européenne on mortgages, which will surely create harmony among us. “Absolutely,” confirms Monsieur le Directeur, “we have already been warned at the highest level that our residential lending system will gradually be changed towards an anglicised model.” It is now my turn to look puzzled. Why on earth would the French want to do that? No risks to the banks, I am told. Could it be a case of the grass always being greener…?
