Mortgage Fraud Detection

Wait until the bomb goes off – or defuse it in advance?

Figures released in October 2011 by both the British Banking Association and the Council of Mortgage Lenders showed that gross mortgage lending increased slightly compared to the same month last year (although their valuations of lending vary considerably: £8.4bn BBA and £12.9bn CML).  Against this less than favourable lending backdrop, the spectre of mortgage fraud remains, something which has been around for a long time even before the recession.  In January 2011 the National Fraud Authority published its second annual fraud indicator, which estimated the cost of mortgage fraud to be £1 billion.

It is well reported that mortgage fraud has seriously affected numerous well known lenders. Some have publicly declared provisions for losses based on mortgage fraud after full investigations – those lenders are no doubt addressing those losses by third party recoveries. 

Yet many issues may currently be masked by low interest rates as loans perform, but can other lenders sit tight and hope their books turn out to be (relatively) fraud-free?  The FSA thinks not [1].  Findings from the FSA’s thematic review of lenders systems and controls to detect and prevent mortgage fraud have found that, whilst some progress has been made, lenders can do a lot better.

Lenders should ensure that:

• Define systems and controls to detect and prevent mortgage fraud.
• Collect and share MI on mortgage fraud both within their own organisation but also more widely.  
• Underwriters are trained to spot mortgage fraud more effectively.  
• Introduce procedures to identify when undue pressure is being placed on underwriters by brokers.
• Carry out a fraud assessment which reviews their back book and clarifies their exposure to mortgage fraud. 

Also, if lenders want to recover any losses from third parties in the future, a back book review now is essential.  4 reasons, one legal but three practical:

1. Six years after loss resulting from a negligent act occurs, a claim becomes time barred. “Loss” may not be the financial shortfall, but could be the legal loss where a lender has parted with money and obtained security worth less than expected.  The claim may then be time barred six years following completion, potentially even if not in arrears. If you only discover you have a loss later, then there is a further 3 years to claim from the date of knowledge of loss, but this allows arguments over when the claimant first knew or ought to have known of their loss. The courts have not always been sympathetic to lenders who have information about fraud somewhere within their organisation, or ought to have been aware from publicly known frauds, but failed to react properly.  Leaving third party claims until after a repossession and sale crystallises a loss is legally risky since the claim may be out of time. 
2. Or, practically, other claims may have eroded the insurance policy limit so that the ‘last in the queue’ gets nothing.
3. Or, for valuers, they may have gone out of business.  Solicitors maintain run off insurance cover even once they have ceased to trade, but once a valuation company ceases to trade their insurance cover may well end, so that any future claimant is left with no asset against which to claim.  Many have already gone – Network, Allied but more may follow if the property market stays flat and claims increase meaning PI cover is difficult to renew.
4. How robust are the insurance companies?  Quinn Insurance went into administration, but they insure a significant number of solicitor firms.

Wright Hassall’s team of experts have experience of mortgage fraud detection across portfolios of thousands of loans.  We can assist with seeking out potential fraud and provide solutions to recover losses from third parties and protect claims against time bar.

December 2011