The headlines continue to report, practically daily, mortgage fraud arrests as the property market collapse continues to wreak havoc. Frauds have been discovered in many lenders’ books, a situation that has become notorious in the wake of the 2008 Morris Properties investigation, even though ultimately the Serious Fraud Office laid no charges in relation to that inquiry.
Inevitably, loans - portfolios of buy-to-let business in particular - that were being serviced when the economy was buoyant are suffering as cash has become tighter. Loans that fall into arrears obviously attract scrutiny and fraud rings become more obvious. The problem is exacerbated when the property market has tumbled some 20% leaving lenders with security worth far less than they thought it was when they made the loans. Simply repossessing the security is not enough to cover their loss.
Not that mortgage fraud is purely related to the slump. One of the well-known recent cases, Cheshire Building Society’s £50m loss, came to light in 2006. That case well illustrates the likely outcome for the perpetrators: criminal charges (going to trial early 2010) and claims against valuers, brokers and solicitors. Some of these claims were dealt with in 2008 when a £21m award was made against the surveyors who fraudulently valued a development at £11.5m when it was in reality worth only £1.5m.
Another very recently reported case, the £8m fraud that used Essex-based Montague Mason solicitors, resulted in the three ringleaders being jailed for five, four and two years on 1 March 2010.
Where fraud is suspected lenders’ investigations appear to be well underway. The worst offences obviously attract criminal charges and recoveries under the Proceeds of Crime Act, but there are other failures that can lead to claims from lenders. Even where the participation of solicitors and surveyors is innocent, negligence claims can still arise.
Solicitors owe duties of care to the lender and give certain warranties during the course of acting on a mortgage. Failure to spot the signs of mortgage fraud - whether that be fake ID, an obviously exaggerated valuation report, a remortgage application showing that the property value has risen dramatically in a matter of days since the borrower acquired the property - can all lead to a claim.
There are also fiduciary duties that might be breached by preferring the borrower’s interest to those of the lender, for example where a material difference in purchase price and remortgage value is not reported to the lender. To part with a lender’s advance where appropriate security is not obtained in return may also give rise to a claim for breach of trust. Either of these claims are powerful remedies because the liability imposed on a solicitor for breaching their fiduciary duties or duty as trustee are far stricter than in negligence, plus the solicitor’s ability to lay the blame back on the lender is far lower.
Solicitors are not the only professionals vulnerable to lenders’ losses. The surveyor or valuer also shares blame where the valuation was excessive, in reliance on which the lender made a loan that is not covered by the value of the security. Anyone who has applied for a mortgage in the last 12 months knows only too well how exceptionally cautious mortgage valuers have become, faced with the consequences of past over-valuations.
Mortgage brokers are also involved and some have been arrested. Some may be innocent participants with insurance for wrongful acts and these can be pursued.
Other remedies are also available to lenders and individuals affected by mortgage fraud. The Land Registry has an indemnity scheme that compensates for their mistakes, where for example they register a document that has been forged. The Solicitors’ Compensation Fund also compensates where hardship has been caused by an uninsured solicitor.
For more information or advice on mortgage fraud and recovering losses, please contact Susan Hopcraft.
