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The Mortgage Fraud Trap

Some lenders, brokers and many others may encourage you to provide false information, get false valuation, but is this right and safe for you.

In this article I want to look at several practices, although wide spread, that may present risks in the future. While everything is fine, lenders are receiving payments and you are completely solvent, everyone is happy to allow some practices to continue, but should interest rates suddenly go up, property prices fall or some other problem outside your control upset things, it is likely that some people will be persecuted, most likely imprisoned and have their reputations torn to threads.

In this article I want to look at three such areas, that may present a risk to you even if you have not intentionally become involved.

Case 1 - the self certification lie

In recent times it has become a general practice, promoted by most brokers, known of by lenders and encouraged by many, to use self certification mortgages and to make up an income figure so as to qualify for the size of mortgage required. These mortgage products were originally introduced for the self employed and others whose income was difficult to prove, but had substantial income. The lenders make it clear that they do not want to see any proof of income whatsoever and you have to just certify yourself it to be true. 

With interest rates low, lenders can afford to have larger mortgages than they could when interest rates are high, but lenders have kept the same income multiples as their lending criteria. In many areas property is priced beyond what the multiply on many peoples salary will allow a mortgage to be obtained at. The answer presented by brokers and in house mortgage specialists has been to make use of the self certified mortgage and lie about your income. While everyone associated with property is aware of this, one undercover TV programme recently 'discovered' it and all but one advisor approached by people under cover, was advised in this circumstance to fit their income to their needs, and lie. Of course the major lender featured was 'shocked' by the revelations.

Income multiples make little sense to most people, as they have no relevance to what people can afford, and particularly while interest rates are so low, seem a silly restriction on who can and who cannot own their own home. The value they do have, at least in theory, to a lender, is that should interest rates increase, they protect the lender from the situation arising where a very large percentage of their borrowers just become completely unable to pay the mortgage and wide scale repossessions occur and property values fall as a result. As the potential risks are high in a situation like this, all lenders stand together, limiting what multiples should be used, none wanting others to lend more aggressively. However at the same time, money at this time is cheap to get in volume, many large UK companies at the moment getting large sums at 1% from Far East bond issues, therefore if you can increase your market share and lend more, there is considerable profit to be made. 

Self certified mortgages also carry a higher interest rate than normal, so some increased risk is covered in this way, also most lenders expect a 15% deposit on self certified mortgages, so even in the case of you not being a able to pay, the price the property sold for would have to be greater than 15% less than you bought it for/valuation  before the lender had any risk at all. With prices increasing the exposure would be unlikely to occur at all.

From this you can see that in theory the lender stands to make more from increased business, a higher interest rate, while at the same time not increasing his risk. So turning a blind eye to the practice of misusing self certification on a wide scale has become a standard practice.

So what is wrong with it, you may say, its just a device to overcome a problem and you are taking the risk. The problem is that in completing the application fraudulently you are committing a criminal act. Like many criminal acts, no one will object as long as everything is going along fine, but, what happens if it does not, what happens if something way outside your control, or some mishap occurs, even a fire at the property, and someone for some reason decides to take a closer look at your activities, or you fall out with someone who is aware that your income could not have been sufficient to purchase the property and decide to make a thing of it. In these, and many other situations some official, probably a police officer whose salary and backhanders have not qualified him to get as large a house as you have, is going to see if they can build a case against you for fraud. They will tell you its not for them to decide if you are guilty that is the role of the court, their role is just to collect evidence. While they are at it, most likely they will come across a number of real and imaginary situations, so when you are charged with fraud it will be a scattershot of charges, arranged so that in order to disprove the silly ones you walk into admitting the others. What others do or don't do, and who else suggested it, is no interest to anyone, it is just going to be this little collection of events, documents and a lot of costume drama, before they give you a holiday at the tax payers expense as an example to others. It will be likely that some of the jury, the barristers and others in the court have done exactly the same as you, but the game of the day revolves around the criminal you, and what a bad person you have been. The game is played out, most involved earn their fees and you end up feeling like a victim of the situation.

Okay you now realize the situation you have got yourself into, don't you, so change to a clean set of trousers and lets look at how to overcome the problem.

Assuming you have had a self cert for a while now, and as prices in most areas have increased, are you able to now reorganize things so as to be able to change to another mortgage. If so this may be one solution.

Another alternative is to look at what you said your income was and to see if you could have had grounds to have believed the figure to be correct. If you run your own company this is not likely to be a problem, as you may have agreed a salary, but then decided to draw less than this for the time being. In most small companies it does not make sense to pull cash out of the company to put into your private account and then pay larger amounts of business interest.

If you don't have a company, then perhaps you should have one, if only to have a theoretical income.

Alternatively as a last stab defense perhaps you could have thought some income was going to be forthcoming, you expected a promotion...... can you document or collect any information now that justifies this approach.

The one point you have to be careful of is that you don't create second fraudulent document to overcome the first, and either get yourself into deeper hot water or if it were accepted would have meant you had committed a  tax fraud.

Case 2 Valuations, revaluations.....

Particularly in the case of high priced commercial property its not all that unusual for lenders to have tried to persuade a property valuer that the value of a property should be the resale value plus 15% plus the fees the lender is to pay, or to say that a specific valuation is a requirement, and the job of undertaking the valuation only goes to the person or firm who will be able to achieve this. As valuers know others will comply, when the job and fee is large enough they will often feel that they should go along with this.

On the face of it, you may say what's wrong with this, the lender has created the situation where they are lending the full actual costs so you need no deposit, and they will have got their fees as well, so as long as you can sustain the mortgage, and particularly where property prices are going up, no one will loose out. Conceptually at least it is the lender who has taken the greater risk. Are you a party to a fraud - this depends on how you are involved and how the deal was set up. 

However, take a similar situation that you may also come across, where you get a number of valuations, and go with the highest, or where you are getting the valuation done by a firm that has other business interests with you or hopes to have, and it is therefore you and them that are presenting the figures to the lender, who may be quite happy to go along with it, they want the business and the profit is good.

The risk to you is probably nearly non existent as long as nothing should go wrong, However if something did, and it may be along way from being connected with you, a whole can of worms could unravel. All valuations and deals with a particular valuation company, lenders manager or some other person could come under suspicion, and you become perhaps an easier target than many.

So how about the situation where you have increased the value of a property and re-mortgaged, who did the valuation, was it completely honest and could with hindsight it be said that they had or thought they were to have some benefit from improving your valuation for you. Did you ask them to or set a target level you wished to get to.

Have you done something that may have caused the valuation to be misleading, for example renting it at a higher rental rate with some cash back or bonus deal, where the valuer has taken the value to be based upon the earning potential of the property unaware of the cash back aspect. 

Not only now, but as you move ahead you need to look closely at each transaction, and ask yourself if the unexpected happened, could this transaction be viewed as fraudulent, even if at the time you had no intention to commit a fraud and all parties had full knowledge of all the facts.

Case 3 planned foreclosure

Not a practice we are aware of in the UK, but encountered elsewhere. 

The practice involves buying property in auctions, foreclosures etc, doing them up a bit, but not necessarily a lot, and then mortgaging them at a new valuation. The mortgage is one that has an insurance attached protecting the lender, who is probably party to what is happening. Few or no payments are made, foreclosure occurs and the property is resold at auction, reaching less than the loan value, and the lender getting the balance from the insurance. The lender having charged an arrangement or similar fee, has shared in the proceeds, and the borrower had a large enough margin to be able to walk away with the windfall or repeat the operation. The only loser would appear to be the insurance company, but they will have stung all who have insurance and be making a profit.

The losers in this case can be those not associated with the fraud, perhaps people who take the figures on the transaction to buy the property at auction at above what it is actually worth, or a person who uses this information to set values on nearby properties. Plus of course honest people who have taken out insurance to protect lenders interest, and been stung by insurance companies.

So why should I want to draw this to your attention, when you are not going to get involved in this. Well you may not, but where it is practiced, you should be careful that the actions that you take cannot be mistook for action that is doing this. In many cases when doing business abroad you will be unfamiliar with local practices, the law and how to get yourself out of any mess that you get into.

Concluding

The purpose of this article is to encourage you to think laterally about risks associated with business transactions associated with mortgages. What after the event, with hindsight could you have said to have been a party too, and why at the time you need to make sure that you have documented and protected yourself, in case things should all go wrong at a future date. Ultimately the only safe way never to incur risk is never to do anything, and as this is not practical we have to look at how to protect ourselves as best we can.

What we are unable to do after the event is to say, it is justified because others were doing it, or that others were a party to the fraud, so were in the know, or that you relied upon advisors. You can't also justify it on the basis that it is common practice and without being involved in this or that, you could not run a profitable enterprise. When your signature goes on a document you know not to be truthful, or you persuade someone to supply information that will allow you to benefit that you know is not truthful, you are in severe risk of having committed a fraud. A small percentage of those that do this will have to act as the token criminals, have their lives, reputations and finances wrecked, and spend some years in the dungeon like conditions, run by bullies and with no rights and ever changing rules, we call a prison system. Particularly in Britain the police like soft targets, those who have not intended to commit a crime or harm anyone as they are less likely to know their rights or have documents to defend their position safely put away.

On the other hand some will have made sure that they had a good case to believe what they had done was honest, and have some documentation to show this. Perhaps some may even have been more prepared and have this put away in a safe place where police officers looking for evidence cannot first find and then lose it, if useful to your defense. 

Scale of the risk to you

Perhaps we have made too strong  an argument and perhaps the risks of you becoming the sacrificial example, and persecuted for what such a large percentage of people are doing at this time, is small. However it is a risk and one that you should be aware of and also one that with some thought can be reduced.

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