New Rules to Combat Mortgage Fraud
New rules have come into force to stop mortgage lenders becoming the victims of over-inflated property valuations.
From now on, developers and builders must reveal if they have offered incentives, such as cash-backs, fitted kitchens or paid-for legal fees to buyers.
Lenders are worried these incentives have led to some properties being sold for more than they are actually worth.
In particular they have been worried about newly built city-centre flats, whose prices have now slumped.
The new rules for the conveyancing industry have been issued by bodies such as the Council of Mortgage Lenders (CML) and the Royal Institution of Chartered Surveyors (Rics).
They have also been supported by the Law Society of England & Wales, the Home Builders’ Federation, Homes for Scotland and the Construction Employers Federation.
Builders or developers of any newly-built, converted or renovated properties will have to complete a 12-question form, revealing to lenders and surveyors any incentives they may have given to buyers.
Buyers, lenders and valuers have all been victims of the non-disclosure of incentives by developers with many buyers left with a mortgage worth more than the property’s real value,” said Barry Hall of Rics.
The CML said this would ensure that any mortgage was granted on an accurate valuation of a property, not one that was fraudulent.
“If developers ensure that they are transparent, and disclose any discounts or incentives on offer to buyers, lenders’ confidence should start to return,” said Michael Coogan of the CML.
The issue was first raised by the CML in February this year as the slump in mortgage lending started to grip the property market, leading to a sharp fall in values.
It said at the time it was worried that lenders were being duped into lending too much money by headline valuations that disguised the fact that the buyer might have been receiving thousands of pounds worth of incentives from the developer.
Some lenders now no longer lend to people who wish to buy newly built city-centre flats.
In some parts of the country, such as Manchester, Birmingham, Leeds and Nottingham, this has led to a highly visible glut of properties which can no longer find a buyer at their original price.
The government’s own house price index, published by the Department for Local Government and Communities (DCLG) said that the price of flats in the UK had fallen by 3.6% in a single month between May and June.
Overall property prices are now down by 10% since the start of 2008 and widely anticipated to fall much further in the next 18 months.
FSA Demands Tougher Mortgage Fraud Action
The (FSA) Financial Services Authority has told lenders to tighten up their defences against mortgage fraud.
This year alone it has banned or fined 17 mortgage brokers who have been implicated in making actual or potentially fraudulent applications.
The regulator says it is monitoring 200 more broking firms to ensure they have sufficient checks in place.
And it also warns that certain lenders may not be guarding themselves against fraud with sufficient diligence.
“The FSA continues to take very seriously the question of whether lenders’ systems and controls for dealing with mortgage fraud are proportionate to the risk,” said Philip Robinson, director of the FSA’s financial crime and intelligence division.
“We are likely to take particular note of cases where weaknesses in due diligence and customer checks - or in outsourced relationships with third parties - may have contributed to a heightened mortgage fraud risk,” he warned.
Easy Credit
The FSA’s call for tougher defences against fraud is targeted at the whole mortgage industry, including the British Bankers’ Association (BBA) and the Council of Mortgage Lenders (CML).
The regulator says the problem became widespread in recent years because of “easy credit conditions and a cut down application processes.”
The FSA is currently liaising with many police forces around the country in its efforts to stop criminals defrauding lenders by making bogus applications for home loans.
The CML’s director general, Michael Coogan, welcomed the tougher stance.
“People may not think of lenders as victims of crime, but unless fraudsters are tackled then honest customers are the ones who end up paying more,” he said.
“We expect that even more lenders will now participate in the voluntary initiative designed to identify and investigate broker fraud,” he added.
Tip Offs Wanted
Since 2006 the FSA has been asking lenders to report suspect mortgage brokers to it.
It has received more than 300 tip offs so far, but is disappointed that only 35 out of the UK’s 150 lenders have made any reports to the authorities.
It now expects the rest to fall into line.
Despite the downturn in the property market in the past year, and the slump in mortgage lending caused by the credit crunch, the FSA warned that the problem of mortgage fraud could revive along with activity in the market.
And it says it may require senior staff at mortgage brokers to become individually approved by the regulator, something which is not necessary under current regulations.
