Keeping an eye out for property fraud

Valuers should consider themselves the ‘eyes and ears’ of lenders as they are in a good position to spot fraud and other misdemeanors, says e.surv‘s Richard Sexton

Five years ago, the role of the valuer in the mortgage application process was a relatively simple one. Valuers were appointed to inspect the property, check whether it met the underwriting criteria of the lender in question and report on condition and value, ultimately allowing a lending decision to be made.

Today, whilst these fundamentals still very much hold true, lenders rightly expect valuers to contribute positively and in an ongoing manner to their overall anti-fraud strategies. The valuer can be a powerful ally in this regard.

Consider that the valuer occupies a unique role in the application process - often being the only individual to physically see the subject property and the applicant. The valuer is also in a privileged position to look the applicant in the eye and ask questions which require immediate verbal answers, rather than carefully crafted written responses.

In addition to the ‘day job’, the best valuation firms now routinely require valuers to look and listen for any clues that a particular case ‘doesn’t feel right’.

This vital ‘boots on the ground’ insight is augmented by centralised panel manager processes which independently analyse the characteristics of each valuation request, searching for potential fraud indicators.

Those worthy of further scrutiny are flagged, examined and where appropriate, brought to the lenders’ attention. Within our own operation, this now occurs for 100 per cent of cases and I believe others are aspiring to a similar approach.

Valuers

In common with other professions associated with the application process, regrettably there have been instances where individual valuers themselves have been implicated in fraud. It’s a truism that worsening economic conditions can change honest individuals’ behaviours and the industry must never become complacent in this regard.

However, initiatives within the industry and the lender community it services have reduced the opportunities for a rogue valuer to accomplish fraud undetected, very significantly.

For balance, a somewhat contrary view was aired at the Council of Mortgage Lenders’ Valuation Conference, which took place in London at the end of 2011.

A speaker suggested that he had details of over 60 individual valuers ‘of concern’. With estimates that there are circa 3,000 active residential valuers in the UK, assuming a random distribution, this would mean that circa 2 per cent of all valuation cases are being completed by one of these allegedly suspect individuals.

My instinct and our objective market intelligence tells me that this figure is on the high side and perhaps includes valuers who have already been dealt with - but lenders and the RICS alike would no doubt be very interested in the detail behind the statement.

I have no doubt that if robust, the information should be shared appropriately and immediately, so that in each instance, the valuer is either punished and removed from the marketplace, or exonerated.

Anti-fraud measures therefore start with the selection of appropriate valuers. Today, this means those that submit willingly to detailed vetting and ongoing monitoring. In real terms, many lenders have less resource available to them since the market collapse - this is where leading panel managers play a critical role in advising lenders on panel makeup and evolution.

Panels have in general shrunk radically since 2007 and intermediaries are no longer able to select their ‘preferred’ valuer. With retrospective analysis, many lenders have confirmed that this was a common feature in known fraud cases - though clearly not one which itself automatically indicates a fraud.

This type of arrangement was widely accepted by lenders, but in retrospect, may have offered temptation to those who were already predisposed to attempt fraud. Today, there is a clear ‘air gap’ between broker and valuer and lenders tend to control all valuation requests.

More widely, property fraudsters have demonstrated a near infinite capacity for innovation and resourcefulness. Typically, by the time a particular fraud methodology has been identified, there is a very real likelihood that a new, undetected variant is being tested against lender systems.

Understandably, lenders are reticent about disclosing details of detected frauds and it is rare for them to publically pursue fraudsters – applications are rejected, averting the immediate danger, but perhaps inadvertently allowing the fraudsters to remain in the market looking for other unsuspecting targets.

This is an area where there is huge common interest but still some way to go in terms of co-operation and information sharing. Data protection and general privacy issues appear to present real barriers to progress at this time, despite lenders signalling a desire for further cooperation.

There are essentially two categories of fraud that lenders and their valuation advisers can work together to reduce - ‘for profit’ fraud and ‘for property’ fraud.

‘For profit’ fraud

This is a broad category, often perpetrated by highly organised groups of individuals that can include financial service professionals and legal representatives, together with ‘mortgage mules’.

The aim of this type of fraud is to extract payment from a lender through deception and these funds are at some point then spirited away. As well as a simple greed motive, very seriously, there is anecdotal evidence that some of these networks ultimately have links to organisations who seek to fund more serious criminal activity such as drug distribution and people trafficking.

I am personally aware of an instance where investigation uncovered very strong evidence of links to a terrorist organisation.

‘For property’ fraud

This second category is more often committed by private individuals who are acting in a fraudulent manner to purchase a property that they otherwise wouldn’t be able to acquire. As such, they don’t profit from an immediate excess of funds.

Whilst this is sometimes considered ‘less serious’- the practice still arguably amounts to a criminal offence and if detected by a lender, will at the very least result in the application being rejected. Sanctions against any implicated intermediary are also becoming increasingly common.

There is no doubt that this type of fraud has grown substantially in recent years, as tighter LTVs and lending criteria, combined with falling property prices, make it increasingly difficult for many to get on the property ladder.

Whilst there are many who may sympathise with the telling of ‘white lies’ to obtain a mortgage, if an individual doesn’t qualify for a mortgage based on his true circumstances, then lenders are actually protecting the individual from future difficulties by rejecting the application - but they can only do so if information they assess is entirely accurate.

In the valuation industry’s expanded role as ‘the bobbies on the beat’, those surveyors recognised as adding the most value for their lender clients regularly detect and report a variety of common scams.

The following represents a selection of the more common issues uncovered by my colleagues in 2011 alone:

Fraudulent valuation documents - These are reports with altered (usually increased) valuation figures or which have certain negative comments removed. Such documents are either entirely manufactured ‘fresh’ or through the altering of bona fide reports using various types of electronic media, or even the old fashioned tipex, typewriter and photocopier approach. They are generally easily identified, and their existence has led most lenders to avoid reliance on paper copy valuations only.

Attempts at bribery/coercion of valuers and other professionals in the process - The ubiquitous ‘brown envelope’ still exists and though thankfully rare, valuers also encounter instances where various degrees of threat are explicitly or implicitly made. As a consequence, it is important that lenders are confident that, like e.surv, all their panel members have appropriate reporting and support mechanisms available to staff should they be confronted with such a scenario.

Misinformation regarding the property - This can range from ‘mild optimism’ in the supplied estimate of value, to deliberate attempts to mislead the valuer around aspects of the property or transaction in order to influence the valuation provided and the supporting comments. Rigorous and independent audit checks on critical information can largely counter this practice

Mortgage mules - Organised gangs often recruit recently arrived foreign nationals or other individuals with ‘clean’ credit records to obtain property/mortgages on their behalf. In some instances, the mortgage, which when issued, immediately places the property in a negative equity situation, is paid for a number of months whilst the fraud is duplicated multiple times. At some point, the whole scheme is brought to a close, with potentially huge sums and numerous mortgage applicants disappearing over the horizon at the same time

Disguised buy-to-let - With typically higher margins, buy-to-let is currently one of the few areas where lenders have real appetite to grow lending books. Professional landlords are sought after applicants as they tend to be associated with loan performance better than that of a ‘standard’ lending book.  Due to the interest rate differential, our valuers have regularly encountered individuals who are representing a property purchase as for their personal habitation rather than as an investment. We often pick these up centrally, even before a site visit, as a consequence of certain signature characteristics that trigger an alert.

Perversely, the reverse scenario is also now true. Our field team increasingly encountered purchase cases disguised as buy-to-let in 2011. Some applicants who do not qualify for a standard purchase mortgage will instead submit a buy-to-let application which may be acceptable, as the lender reviews a different set of criteria, compared to a purchase mortgage. The buy-to-let mortgage is provided, but the property is never let - but with the applicant ‘happy’ to pay a higher interest rate for the privilege of getting on the property ladder.

Property substitution – a category where, to boost the reported valuation figure or to obtain a mortgage where none would normally be forthcoming, a party shows a surveyor a different (better) unit on a development or in a given block. Changing door numbers is a crude but not uncommon practice in this category.

Practices of concern

Valuers can also be helpful highlighting practices which whilst arguably not fraud, nonetheless cause real concern. Examples from 2011 in this category include new build poor practice.

The CML Disclosure of Incentives form helped significantly reduce issues associated with new build. As such, the initiative should be roundly applauded and with an updated version imminent, can do even more to mitigate issues in 2012.

However, our valuers still identified New build ‘back to back’ transactions, where the applicant was in ignorance that he was not buying from the developer, but from rather investors who have bought or were buying a number of units from the developer.

Instances of less scrupulous developers seen to disguise a new build incentive by paying over market value for a part exchange property and then not declaring this on the CML DIF form were also reported.

A subset of smaller new build developers were seen to be creating artificial sales to family members/nominees in order to raise working capital and set unrealistic ‘valuation tone’ on developments

2011 also saw a rise in the number of firms that offer to purchase from ‘distressed’ sellers at below market value, but which then require a fee up front before the company will consider the application. I make no comment regarding the rise of sale and rent back in general, which is now regulated by the FSA.

However, in some instances, it appeared that there was no real intention to purchase - just an exercise to generate income from application fees. When brought to the lender’s attention, 'distressed' purchases where the lender was unaware that the vendor was selling to an investor, but intended to remain as a tenant, usually resulted in a cancelled application when flagged.

Summary

To remain relevant, valuers need to consider themselves very much the ‘eyes and ears’ of the lenders. The industry has a vital role to play in identifying attempted fraud and poor practice - but the industry must also anticipate and respond to the potential next likely strategies from the fraudsters.

Whilst some are uncomfortable airing issues of this nature, my view is the more we openly debate best practice, the better we will be able to mutually tackle the menace. However, I’ll conclude by stating the obvious.

As professional advisors, there are many tools and countermeasures at our disposal that work best when not publically disclosed. Potential fraudsters should reflect on the fact that somewhat like stealth bombers, many exist, but only essential individuals know exactly where they are.

Military scholars will also confirm that the US Air Force also has a history of revealing their ‘latest’ secret weapon, but only to disguise the fact that they have already deployed the next one….sleep well, Mr Fraudster.

Richard Sexton is director, business development at e.surv Chartered Surveyors