27th January 2021
There is a melting pot of issues that are likely to come to the boil in 2021.
Some issues are obvious, such as the devastating impact of the pandemic on the economy and rising unemployment, both of which are inevitably resulting in financial difficulties for many individuals and businesses.
Others may be less so. For example, interest rates are likely to be low for some time; property values have been historically high and there has been a further upward rise in property prices as a result of recent, temporary stamp duty changes. Taxation reforms also represent a squeeze on landlords. The latter costs are likely to be passed on to tenants, many of whom may be in the lower income category and already facing significant post-Covid financial pressure.
The move towards working from home involves reduced interaction in person and greater reliance on documents. This results in a reduction in the ability to discuss a transaction and raise queries that might then lead to a potential fraud being picked up. Taken alongside the increase in conveyancing transactions occasioned by the stamp duty holiday – perhaps being processed by fewer employees due to furlough leave and job losses – that will create a perfect storm with the risk of checks, balances and details being missed.
Financial hardship, depression/stress/anxiety, declining property values, and decreased due diligence are all known contributors to fraud – hence the likelihood that 2021 will see an increase in the commission of new mortgage frauds.
Add to that the fact that current credit-risk modelling and scenario-planning may not take account of risks associated with ‘little white lie’ frauds  which have already been committed and which might have been camouflaged as performing loans in more favourable economic and property market conditions, and 2021 is also likely to result in many such frauds (and consequential under-performing accounts) coming to light.
Against this background, Banking Litigation specialists Louise Power explains the particular risks associated with mortgage fraud at the professional level, within the home and in respect of investment properties in 2021, and offer practical advice for prevention.
According to an October 2019 report from Onfido (a London-based vendor of AI-driven Fintech fraud solutions), incidence of fraud data demonstrates that many fraudsters are actually making a profession of it, working Monday – Friday and taking weekends off.
At this ‘professional’ level, a key risk for lenders is ‘property hijack fraud’. This generally involves one fraudster posing as the owner of the property and pretending to sell it or to re-mortgage it, and often another fraudster posing as a purchaser and applying for a mortgage. The fraudsters employ increasingly sophisticated identity theft schemes, and state-of-the-art tech and systems expertise, to dupe innocent conveyancing solicitors, financial advisers/intermediaries and mortgage lenders in order to circumvent due diligence and underwriting processes.
Associated techniques adopted by ‘professional’ fraudsters include impersonation of conveyancers, intermediaries, lenders and/or parties to a transaction; ‘phishing’; and soliciting personal data via specific Covid-related scams, such as fraudulent e-mails, calls, texts from fraudsters posing as banks/lenders, charities, government officials, landlords etc. offering lower rates, lower rent, loan modifications, payment holidays/arrangements and other post-Covid relief or benefits etc.
Following completion, the fraudsters in a property hijack fraud disappear with the mortgage advance and often the fraud is not detected until days or weeks after it has been carried out – often meaning that the funds themselves can no longer be located or recovered.
Frauds in the home and spouse frauds often involve one partner borrowing against a property without the knowledge and consent of the other. In times where small and medium-sized businesses are feeling the strain, desperate and ill-judged decisions to “borrow against the house” will likely flourish if it is the only way to save the business from failure.
Such frauds also typically involve the provision of false or exaggerated (AKA ‘staged’) income, applicants reducing declared expenses to inflate apparent net profit; and credit abuse such as the non-disclosure of adverse credit, typically by failing to reveal a former address associated with defaults/CCJs.
Investment property fraud typically involves buy-to-let properties. These are often ‘no money down’ transactions, and there are a number of dishonest mechanisms which fraudsters can deploy. For example, sub-sales, back-to-back sales and gifted deposits – all common within the buy-to-let scenario – are designed in such a way as to facilitate a fraudster not disclosing to the lender the true purchase price that is being paid, with a view to the fraudster borrowing 100% of the true purchase price and, in doing so, not putting their own funds at risk. That can result in underwriting decisions, mortgage offers/advances and loan to value ratios being misconceived, and lenders ultimately suffering a shortfall if, at a later date, the property has to be repossessed. Scheme abuse – that is, where borrower misrepresents purpose behind their loan (such as renting out a property purchased with a residential mortgage without the lender’s consent) – can also be a particular risk associated with investment properties.
These types of frauds often come to light in an economic downturn, when defaults increase and re-mortgaging proves difficult or impossible due to negative equity.
There are a number of legal options by which a lender can attempt to recover lost funds/security but prevention of fraud will be more cost- and time- effective than any such cure.
So, what steps can lenders take to prevent mortgage fraud in 2021?
In respect of mortgage fraud at the ‘professional level’, within the home and in relation to investment properties, fraud risk management can be proactive (for example, putting into place systems, processes, checks etc when customer data is collected and stored – often as part of the on-boarding/account-opening process); and reactive (where fraud is suspected and/or detected). Being aware of the risks can help lenders and their advisers to spot potential indicators of fraud; adopting rigorous Know Your Client (KYC) due diligence in spite of changed working practices and related post-Covid challenges; and investigating/applying suitable Fintech solutions can all contribute to effective fraud prevention.
In particular, the following practical pointers may assist:
Walker Morris’ cross-disciplinary Financial Services specialists are experienced and expert in dealing with all aspects of mortgage fraud prevention and cure, ranging from the provision of staff training and the preparation of policies and procedures to prevent, mitigate and respond to fraud; to litigation, tracing, recovery and enforcement action when the worst does happen.
If you would like to discuss any of the issues covered in this article, if you are interested in Walker Morris fraud prevention training, or if you would like any further advice or assistance in connection with the risks and prevention of mortgage fraud in 2021, please do not hesitate to contact Louise Power.
 An Equifax survey carried out in Canada in 2017 found that 8% of respondents admitted to making material misrepresentations on mortgage applications and 13% saw no issue with telling white lies on applications
 leveraging a user interface to reduce the time it takes to gather intelligence and to investigate and assess risk and generating scoring networks created from underlying data to drive insights, uncover hidden relationships/risks
 the process of combining third party data from an external, authentic source, with data held internally and the classification, grouping and segmenting of data to search through up to millions of transactions to find patterns and detect fraud