The costly business of mortgage fraud
Alan Cleary of Exact Mortgage Experts outlines the latest trends in mortgage fraud and emphasises the importance of mortgage book assessment to spot fraudulent activity
In August 2009 two Chinese business people were executed for defrauding investors out of more than £70 million. Even with the threat of death there are still those who are willing to take the ultimate risk for easy returns. In the
In 2008 the Association of Chief Police Officers (APCO) published figures for 2007 showing that organised crime groups netted £700 million in mortgage fraud. With no official figures from APCO relating to 2008 and 2009 we can assume the cost accumulated over the last two years is still being counted. However, the KPMG Fraud Barometer shows record levels of fraud in 2008 and predicts fraud will continue to rise in 2010. As they describe it, fraud has a ‘long tail’ and it can be years between the fraud being committed, detected and the perpetrator being brought to justice. The full impact of the economic downturn is yet to rear its ugly head.
What is clear is that incidents of mortgage fraud are rising. High profile cases continue to be brought to light. Over the last few months we have seen a number of ‘big ticket’ mortgage frauds presented to the
On average, each individual case of deception is estimated to profit the perpetrator £45,000. Multiply this by the number of deceptions a career fraudster may be engaged in at any one time and the rewards are extremely attractive. On the surface, anyone found guilty of defrauding mortgage lenders can expect to receive fairly hefty reprisals. Prison sentences of up to 10 years are not unusual. However, with good behaviour these terms can be reduced by up to five years. This is not enough of a deterrent. Fraudsters are targeting the mortgage market because these scams are so profitable. ACPO highlights a case in which one fraudster made a profit of £10 million. For some, a five-year prison sentence is a small price to pay for that amount of return.
False documentation
Mortgage lenders currently have to battle against two types of fraud – fraud for housing and for profit. Fraud to obtain housing is generally indulged in by those who do not or cannot qualify for a mortgage. The fraud can consist of the perpetrator exaggerating their income, misrepresenting their employment, concealing or failing to disclose liabilities and other financial interests, and misrepresenting occupancy. Much of this deception is performed via false documentation such as payslips, bank statements and utility bills.
With the increase in regulatory scrutiny, ‘lower level’ fraud (false documentation) has become more prevalent over the last 12 months. The current economic environment has lent itself to this increase. The credit shortage we’ve suffered throughout 2008 and 2009 has meant more and more people are resorting to underhand tactics to obtain loans.
It’s never been easier for those who need false documentation to obtain it. A quick internet search brings up hundreds of sites offering “replica” documents from pay-slips to utility bills and even passports. These sites claim the documents are for novelty, theatrical or training purposes or for those who have lost their original paper work. However, the owner of one site has claimed brokers are his biggest customers.
It’s even possible to create these forgeries at home. A specific high-spec printer had to be withdrawn from sale at one high street outlet after it was revealed it was capable of producing high quality replicas of the documents mentioned above.
Not only is fraudulent documentation easy to come by but there are also websites offering virtual employment. Fraudsters set up a fake company and these sites will act as your office, taking calls for you, answering politely in the correct regional accent and even advertising your number in the phonebook and online. Lenders face an uphill struggle when it comes to verifying documents supporting an application – fraudsters now have many of their bases covered.
It doesn’t stop there. In a lot of cases the perpetrators are stealing identities in order to obtain “genuine” documentation from sources such as the DVLA. When these documents are included in a mortgage application the verification checks will be returned showing the document is acceptable even though the underlying identity is not.
Organised crime
However, these scams are relative small-fry compared to the larger operations in the market for huge profits. As mentioned above, in December 2009 six people, including solicitors and a property developer, were charged over a £50 million mortgage fraud. This network of alleged fraudsters is accused of selling properties between one another in a number of back-to-back deals at highly-inflated prices. They are alleged to have then used the inflated sale prices, fraudulent valuations and forged leases to obtain loans from banks and building societies. After receiving the mortgage cash, they then defaulted on the mortgages — leading to large losses for the mortgage lenders.
This highlights the second issue lenders are fighting against – fraud for profit. Depressed asset values and a waning property market mean there is less money to be made out of property legitimately. As a result, many individuals may resort to fraud to recover lost margins.
This type of activity is generally performed by a number of agents in collusion and can involve estate agents, solicitors, surveyors, brokers and accountants. It’s possible for these fraud rings to make vast profits through equity skimming, cash-back schemes, valuation inflation, shorting, and identity theft. The rewards can be huge. Because this kind of fraudulent activity is so hard to port on a mortgage book it can escalate before the lender identifies a problem.
Some of those involved in this form of scam will be in it for personal financial gain but professional pressure may also play a part. Even stiff sales targets in the midst of the economic downturn could cause the number of cases of this type of fraud to rise. KPMG has highlighted this problem warning of the dangers caused by the drive to secure new business. Bribery and corruption offences by employees and third parties will become more of an issue. This could be particularly acute for lenders.
Tighter regulation
The Financial Services Authority has acknowledged the need for tighter control to combat the rise in mortgage fraud. The publication of the Mortgage Market Review showed the FSA intends to impose tighter control in the application process particularly with regard to income verification, the extended regulatory scope to buy-to-let (BTL) and the end of self-certification.
A firm hand is exactly what is needed in order to remove the bad apples from the barrel. Over the past twelve months the regulator has banned and fined over 50 intermediaries for fraud or malpractice. While the flurry of activity by the regulator is necessary and very welcome, simply cutting the tops off the weeds won’t solve the problem – they need to be uprooted. The onus is on lenders to ensure this is done.
Lenders
But how much can lenders do themselves?
The pressure on lenders’ fraud teams is rising as the volume of documentation that needs to be checked increases. More staff will be needed to cope with the new regulatory parameters – a cost that many lenders could do without. However, experience takes time to build. Unless lenders invest a huge amount in hiring suitable numbers of experienced fraud staff, teams will be back at square one regardless of how many bums on seats they have.
It doesn’t begin and end in investment in people. Many lenders simply don’t have the processes, procedures or technology to cope with the increased demands of the current environment. The market is a very different beast to that of 2007. It’s vital that lenders have procedures in place and technology at their fingertips designed and built for today. Mortgage books must be analysed intelligently and on a loan-by-loan basis in order to weed out the fraudulent cases.
It is possible to take proactive steps to safeguard a potentially vulnerable position. If just one large fraud case is found during a risk assessment it can pay for the entire project. Mortgage asset investors should understand the value of assessing mortgage books for fraud. Compared to writing off a full mortgage balance (averaging £120,000) a full fraud check as part of an Asset Quality Assessment will cost a lender a mere fraction.
Mortgage book assessment
While the risk may already be held in a book, identifying affected accounts can help mitigate the problem in a number of ways. Intelligence can be provided for collection strategies, preparations can be made for professional negligence claims, more robust in-house fraud management procedures can be developed and buy-back opportunities for previously traded assets can be identified.
In assessing the quality of a book, lenders need a multi-dimensional view of risk within the mortgage pool, including both credit and fraud risk across 100 per cent of the loans. It is important an optimal range of fraud management tools are utilised, and there are three key approaches which must be employed. This application of a blended approach can lead to valuable results being achieved in an asset assessment.
First, fraud propensity scoring must be implemented. This is based on the borrower’s latest credit bureau information together with other appropriate databases. The score indicates the propensity of a mortgage account being fraudulent and, used as part of a full fraud risk framework, provides a valuable insight at both pool and individual loan level.
Second, national fraud matching identifies discrepancies between the account details being reviewed with any associated application details across other lenders in the
Third, the use of experience from the full range of mortgage markets over a number of years. We have reference files containing huge volumes of data on suspect parties and properties. These include mortgage intermediaries, solicitors, valuers, and certain developers that may raise alarm bells and trigger further investigations.
We’ve performed more than £4.2 billion worth of risk assessment for clients who either own or want to buy mortgage assets. In our experience, every book reviewed has had some evidence of fraudulent activity – many with specific loans which are too risky to even go near.
Catching and bringing to court the high profile fraud cases is good for the industry but it’s arguably better for the regulators and police. High profile cases mean positive press attention for the supervisory bodies while lenders continue to be duped out of millions of pounds by other unscrupulous individuals.
The industry itself needs to do more to prevent mortgage fraud. The age old problem is that lenders are often reluctant to do a comprehensive analysis of their own mortgage books because any fraud which is identified will affect their balance sheets. There’s also the embarrassment of admitting that you’ve had the wool pulled over your eyes. This is understandable, but times have changed and those in the fraud firing line must bite the bullet and act now. Lenders must face any problems head on before they get out of control.
Alan Cleary is managing director of Exact Mortgage Experts
