But could that all be about to change? Insurers have begun to report that they are once again seeing an increase in the number of claims arising from mortgage fraud. In the early 1990s, the majority of claims arose from residential conveyances with the huge losses suffered arising from the sheer volume of the claims. Fraud which are emerging this time around are not yet on the scale seen before and the economic conditions are nowhere near the same.
However, there are claims for much higher figures arising from commercial, as well as residential, conveyancing transactions. If interest rates go up and levels of repossessions increase, so will the number and value of claims. This could lead to serious losses for insurers and an increase in premiums for solicitors, particularly those involved in property work.
The changing market
One of the problems that the profession will inevitably encounter is that many solicitors practising today will not recall the property crash at the end of the 1980s, which led to the multiplicity of claims by lenders against solicitors and surveyors. Many will also have no knowledge of the warning signs of mortgage fraud, which were highlighted at the time of these claims. There is, therefore, a need for solicitors to inform themselves of the indicators of fraud and be vigilant in looking out for them otherwise they and their insurers may ultimately have to foot the bill.
Mortgage fraud is, without a doubt, always around. But it is generally only in certain economic conditions that lenders suffer loss and look to recover that loss from the professionals who advised them. Over the past few years we have seen a sustained period of growth in the property market and fraudsters, whose main aim is usually to get lenders to lend more than they would lend if the true facts were known, may well have succeeded in their aim, as the rising market will have masked their activities.
Interest rates have now begun to rise rapidly and that has already begun to have an impact on the market. According to the Financial Services Authority (FSA), in 2006 repossessions rose 65% to 17,000 from the previous year. While still a long way short of the 75,000 repossessions which took place in 1991, the rising number of repossessions is significant. The last few years have also seen a very significant rise in the number of buy-to-let mortgages issued by lenders to individuals who have built up portfolios of properties. More difficult market conditions could see very large numbers of these amateur property developers unable to meet
their mortgage repayments and the means by which some of the more unscrupulous among them they were able to borrow very large amounts will begin to come to light.
The warning signs
The starting point for solicitors advising on property transactions is the Law Society Green Card which was first published in 1991 and has since been updated. The Green Card sets out certain key things to look for which might assist in spotting a property fraud and also identifies steps that a solicitor might take to minimise the risk of fraud. Solicitors must be aware of the provisions of the Green Card because the courts are likely to work on the assumption that a solicitor who has acted for both borrower and lender is well versed in its requirements and are likely to be harsh on anyone who is not.
Some of the main factors that solicitors should look out for when acting in a transaction for both borrower and lender include:
- Sub-sales or back-to-back sales in which the purchase price of a property is misrepresented to a lender by virtue of an immediate onward sale so that the lender is fooled into lending 100% or more of the value of the property.
- The supposed payment of deposits directly from the vendor to the purchaser, which may conceal from the solicitor that in fact no deposit has been paid and the lender is therefore lending a higher percentage of the true purchase price than it thought.
- Allowances or reductions in purchase price whereby the price of a property is discounted as an incentive. The lender lends on the original purchase price and is not made aware of the reduction.
More recent variations on these themes are likely to include ‘cashback’ transactions in which the true value of a property is masked by virtue of the repayment of a cash sum in order to allow a purchaser to borrow 100% of the value of a property.
A newer, and even less sophisticated, form of mortgage fraud is that perpetrated by virtue of identity fraud. Ownership of land is no longer proved by way of land certificates, which were abolished in 1993, but rather by the Land Register itself. It is therefore possible to view details of a property online and then tell the Land Registry that the property has been transferred if sufficient personal details can be provided. Often the Land Registry will discover anomalies and the transaction will not proceed. However, this will not always be the case and there have already been instances of properties being registered in a new name when in fact no sale has taken place. The property can then be sold on and used to commit mortgage fraud, possibly on a very large scale, if the property concerned is a commercial building or a high value residential property.
Solicitors must be aware of these possible pitfalls and report anything that may have an impact on a lender’s decision to lend. A failure to do so can have very serious consequences.
Reducing the ultimate bill
A solicitor who fails to spot that a client has perpetrated a mortgage fraud may, however, find that all is not lost if a claim is brought against him. The experience of the 1990s shows that there are avenues to explore that may help to reduce the ultimate bill to insurers. These include contribution claims against other professionals such as surveyors, who will usually need to overvalue a property in order for a mortgage fraud to succeed and also possibly financial intermediaries such as mortgage brokers. They may also be found to have contributed to their own loss as the result of lax lending practices. In the relevant case law, awards of damages to lenders have been reduced by up to 90% to take account of this.
The fact remains, however, that in the event of a sudden or even slow decline in the property market, a high number of claims for mortgage fraud could lead to a very real change in the solicitors’ insurance market. Only time will tell what the eventual outcome will be, but solicitors should heed the current warning signs.
Sarah Clover is the head of and Marianne Robson an associate director in the solicitors’ professional liability team at Barlow Lyde & Gilbert.