Effects of greed-driven mortgage fraud may linger for years
WHEN the credit crunch arrived, banks that had bent over backwards to lend money started to take a closer look at who they had given mortgages to. They had been given to individuals who weren’t safe bets and to others who were using mortgage applications to execute fraud on a huge scale.
In the rush to lend, and make a handsome profit on the loan, many financial institutions failed to do their homework. The consequences are now clear: house repossessions, fraud prosecutions and thousands struggling to pay their mortgages while thousands more find it near impossible to secure a mortgage.
One large-scale fraud is a perfect example of how greed led financial institutions to lose all common sense. Summer 2011 saw two men, one who was a surveyor, convicted for a £50m mortgage fraud and sentenced to 13 years and seven years. The scheme involved buying buildings, creating false records of them being bought and sold at ever-increasing prices, producing fake documents showing high rents being paid for them and then preparing bogus valuation reports. Six solicitors were charged in relation to the scheme. Three were acquitted and the jury was unable to reach verdicts regarding the other three.
Such fraud can only succeed with the co-operation of property professionals so that values of properties can be inflated and lenders duped into lending people far more than a property is worth.
Mortgage fraud can involve simply lying on an application form or the use of hidden incentives, such as cash back or a gifted deposit, to clinch a sale. The Council of Mortgage Lenders has rules on the use of such incentives but the system is still open to manipulation. Houses can be bought from owners (who are often struggling for cash) at knockdown prices and leased back to them by buyers who then use the property as security to obtain large mortgages that are never repaid. The perpetrator flees with the ill-gotten mortgage money and the person who sold the house (and still lives in it) is left with their fate in the hands of an angry lender who has been cheated out of a fortune.
Property professionals are expected to be beyond reproach in the way they carry out their work. The vast majority of professionals work under this expectation without any problem. But if they find themselves knowingly or unknowingly entangled in mortgage fraud, its complexity makes it exceedingly hard for them to escape any of the blame, whether they are guilty or innocent. The packaging up and selling on of bad loans for the disastrous sub-prime mortgage market precipitated a banking collapse that was due solely to greed-induced fraud and left a trail of guilty people.
As solicitors we regularly represent clients accused of mortgage fraud. At present, we are representing people who, it is alleged, are involved in what has been described as the largest property fraud the UK has seen in a decade.
But whether the fraud is on a small or large scale, the same principles have to be established in an investigation. Were the professionals involved in the deal all acting honestly and above board? What checks did they make before becoming involved? What similar work have they carried out over the years that had not carried the slightest hint of wrongdoing? The complexity of many fraud cases means that very often the truth is far from clear. And with major league mortgage fraudsters and the little man who can’t now pay his mortgage both now feeling the full force of the law, these are testing times for many in the property world.
The legal implications may not be fully apparent for some time. The greed-driven fraud went on for a long time and its after effects may linger for many years.
Aziz Rahman is founder of Rahman Ravelli Solicitors, Halifax and London-based specialists in fraud and business crime. www.rahmanravelli. co.uk