No one likes admitting they’ve made a blunder and it’s no different for lenders and mortgage fraud. Fraud is wildly under-reported in official statistics – millions of pounds of fraudulent loans are written off as credit losses every month because they slip through the net unidentified. The credit crunch has swept through the UK’s mortgage market and left it barely half of its size just a year on.
Instead of continuing down old roads, lenders should see the changing winds as an opportunity to streamline their lending practices and stamp on fraud. The lending community must work together to identify risks – reassessing mortgage books can throw up patterns of fraud undetectable at origination. Things are only going to get worse as Britain slides further into recession and people turn to crime to keep their shirts. Working out which brokers, solicitors and valuers are vulnerable to fraud, not to mention if there’s an insider sitting behind an underwriter’s desk in your office, could save billions for lenders in the future.
Escalating levels of credit risk in mortgage asset are being extensively documented as economic conditions deteriorate further. But, regularly, the underlying blame for increased delinquency and loss lies squarely with fraudulent activity. During more benign times the lack of distinction between credit risk and fraud risk may not have appeared significant, but with focus now so clearly on loan book performance, it is critical reasons for default are clearly understood.
We do not know the exact extent of fraud risk, and probably never will, but there is research being done in an attempt to quantify the threat.
KPMG reported a ten-fold increase in mortgage fraud between 2007 and 2008. Their measure is still well below the estimate of £700m reported by the Association of Chief Police Officers in 2007.
Additionally, there is reasonable evidence to suggest the economic downturn will continue to accelerate the volume of mortgage fraud. Reporting a 68% increase in mortgage fraud during 2008, Peter Hurst, chief executive of CIFAS, the UK’s Fraud Prevention Service, stated:
“With Britain now in recession, a significant rise in fraud is inevitable, as people turn to crime to make ends meet. These figures are just the beginning. They also show very clearly that fraudsters adapt their methods in response to changes in financial markets”.
Indeed, such is the prevalence of mortgage fraud, that the government established an agency via the Attorney General’s office in October 2008 – The National Fraud Strategic Authority (NFSA) – to address this growing issue specifically. While the NFSA acknowledges the causes of mortgage fraud are complex they are succinctly categorised as follows:
- Professional Corruption: Mortgage lenders have been victims of frauds that have utilised corrupt mortgage brokers, solicitors, surveyors and accountants on an organised basis. It should be noted that while the number of corrupt professionals are a minority, the amount of harm they can cause is significant.
- Insider Corruption: For example, where a criminal infiltrates a mortgage lender. Loan amounts could be increased or manipulated after they have been agreed by underwriters, but before being processed. CIFAS reports that 48% of firms with over 36 staff have experienced staff fraud.
- Due Diligence and Internal Control Failures: Lenders are required to carry out ‘know your customer’ (KYC) and due diligence checks. Where these have been exploited, lenders have been more vulnerable to fraud.
In some cases this is due to a lack of internal checking. In others, the risk of fraud is exacerbated by lenders’ lack of access to verify some of the customer identity documents which are essential to the KYC process. Forged documents – such as bank statements – are now readily available, yet some banks are unwilling to confirm if those being reviewed are genuine.
- Procurement Process Weaknesses: Undeclared discounts and cash-back incentives have distorted mortgage transactions and resulted in lenders advancing more than they otherwise would have on certain properties.
- Self-certified mortgages have also carried a high level of fraud risk. These cases highlight that some of the checks and balances across the mortgage process have not had the intended effect in mitigating these vulnerabilities. Also, over-valued properties (whether these relate to error, negligence or fraud) are harder to spot when there is a flourishing market, as natural market rises disguise the impact of overvaluation on property prices.
It’s expected that the level of potential exposure to fraud loss is extensive for mortgage originators. But fraud exposure is also a serious concern for holders of mortgage assets – even if their loans are relatively seasoned. The type of risks outlined above may never have become visible in a persistently buoyant environment. Fraud committed prior to the dislocation of the markets may only now be starting to emerge. Particularly fraud connected to over-valuations, lack of incentives paid on new builds and charge registration issues. Despite the risk, it is possible to take proactive steps to safeguard a potentially vulnerable position. While the risk may already be held, identifying affected accounts can be beneficial in a number of ways: Providing intelligence for collection strategies, enabling preparation of professional negligence claims, developing more robust in-house fraud management procedures and identifying buy-back opportunities for previously traded assets.
Exact’s Asset Quality Assessment (AQA) service provides a multi-dimensional view of risk within a mortgage pool, including both credit and fraud risk across 100% of the loans.
A combination of significant investment in technology and experienced people helps Exact offer its clients the most advanced means of identifying fraudulent and potentially fraudulent activity in the market. An optimal range of leading fraud management tools are utilised, and it is the effective application of this blended approach which leads to such valuable results being achieved. The key methods employed are as follows:
- Fraud Propensity Scoring: based on the borrower’s up-to-date credit bureau information together with other appropriate databases, an overall fraud index is determined. This score indicates the propensity of a mortgage account of being fraudulent and, used as part of a full fraud risk framework, provides a valuable insight at both pool and individual loan level.
- National Fraud Matching Database: a powerful tool enabling Exact to identify discrepancies between the account details being reviewed and any associated applications made to other lenders in the UK. This is not limited to basic borrower information, but drills down to granular detail, identifying discrepancies in data and links to apparently unrelated fraudulent activity.
- Reference File: based on extensive experience in the full range of mortgage markets, Exact possesses huge volumes of data on suspect parties and properties.
This will include mortgage intermediaries, solicitors, valuers, and certain developments that may raise alarm bells and trigger further investigations. As a lender it is not always easy to admit you may have originated fraudulent or suspect mortgages – indeed, affected accounts are regularly put down to credit risk appearing at a later date, particularly during these turbulent times. Equally, as an asset purchaser there may be a reluctance to acknowledge that due diligence carried out ahead of the transaction did not consider all elements of 100% of the accounts and was based only on those origination files reviewed.
However, this should not mean that the opportunity to rectify the situation is passed up. On average Exact finds approximately 1% of accounts analysed have confirmed issues together with many more identified as “high risk”. Recent examples of cases identified include:
- A portfolio of BTL mortgages secured on hotel rooms, but valued as and reported to be purpose built flats.
- A solicitor involved in fraud ring with potentially £50m of losses across several lenders.
- A single customer who was arrested for his active part in a £100m drug scandal.
- One such account can fund a full AQA exercise – a small price to pay for transparency of and confidence in the existing balance sheet.
