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Deloitte

BEWARE OF MORTGAGE FRAUD “TIME BOMB”, WARNS DELOITTE

Falling house prices will reveal full extent of fraudulent mortgage activity, says forensic accounting expert 

The South West‘s financial services industry faces yet another body blow in the shape of a mortgage fraud “time bomb”, according to leading business advisory firm Deloitte.

Tracy Hunter, who leads the Forensic and Dispute Services team at Deloitte in Bristol, says the continued decline in the housing market is set to uncover a massive increase in mortgage fraud – with last year‘s figure of £700 million being only “the tip of the iceberg.” 

“The full extent of mortgage fraud is unlikely to be known for some time but it is clear incidents of fraud are sharply increasing,” comments Tracy Hunter.

“In March the Association of Chief Police Officers issued an intelligence report to financial institutions and police forces highlighting £700 million of confirmed mortgage fraud in 2007. However, this is really just the tip of the iceberg - either because the mortgages are still being serviced, or because losses have been written off as bad debts. 

“And the problem is not just confined to the UK. We have already seen mortgage fraud soaring in the US in the past year. In just one case, the BBC reported in June that the FBI arrested 406 property market players as part of a crackdown on alleged mortgage fraud worth an estimated $1 billion.”

Tracy Hunter says a new drive by the Financial Services Authority (FSA) to crack down on mortgage fraud and “corrupt professionals” will start to reveal the full extent of the problem in the coming months.   

“The FSA is now taking a firmer approach and this year, mortgage fraud has begun to hit the headlines.

“The FSA has banned 17 mortgage brokers this year, and in one case, a heavy fine was imposed for submitting mortgage applications containing false information. However this initiative is not limited to mortgage brokers. In July this year for example, an accountant was arrested and charged with offences of deception relating to an alleged £2.2 million mortgage fraud. 

“This is a time bomb which is about to explode across the South West and other regions, as conditions in the housing market continue to deteriorate.

“While house prices were rising, much of the fraud was hidden and lenders did not register big losses. But now, falling prices mean fraudsters are more likely to walk away from these mortgages, exposing lenders and other mortgage firms to potentially much larger losses.”

Tracy Hunter says mortgage fraud is no longer a case of individuals inflating their income to buy their own home – it is now big business and involves highly organised gangs, with the new-build apartment developments which have sprung up in city centres across the UK being a particular target for the fraudsters.  

“There has been explosive growth in so-called ‘Fraud for Profit‘, a scheme often involving collusion between property professionals, where the sole purpose is to make money,” she said.

“An example of this is known as ‘flip fraud‘, where properties are bought and re-sold in a very short period of time at an over-inflated price. The second purchase uses a fraudulently obtained mortgage and a ‘straw borrower‘ in a co-ordinated attempt to obtain an inappropriately large loan. Typically, the average ‘flip‘ is between £30,000 and £45,000, the mortgage goes into default, and the parties involved share the ill-gotten gains.  

“The increasing attention of the FSA does not mean this problem is going to go away,” concludes Tracy Hunter.

“All interested parties need to work together to mitigate the extent of the problem. In the meantime, the expression ‘safe as houses‘ has never seemed less appropriate.” 

ENDS                         6th November 2008  

For further information please contact Neil Fraser, Sturgess Van Damme, on 01275 349011 or email neil@sturgessvandamme.co.uk