Mortgage fraud is down but certainly not out

The incidence of mortgage fraud has decreased to some extent over the past couple of years, but it is still going on, and lenders are putting more and stricter regulations on borrowers asking for loans on buy-to-let properties.  According to lenders lost around £1 billion to mortgage fraud in 2010 as opposed to nearly £3 billion in 2007.

Apparently, the rash of fraudulent deals that became so common during the property boom a few years ago is moving to the buy-to-let market as a source of revenue for the shady dealers, and the result is a lot of unknowing investors who lost their savings (and sometimes their shirts) on those deals.  Basically it’s a case of the lender making a loan under terms based on unrealistic or deliberately falsified amounts of rental or other income.

In some cases the fraud is actually unintentional on the part of the borrower whose name is on the loan documents.  A buyer may think he’s getting a rental property with established tenants and enough guaranteed income to service the mortgage, and applies for a loan on that basis.  However, if he is dealing with dishonest valuers who supply pumped-up figures on income that inflate the property’s value, he soon finds himself in trouble.

In other cases it’s mortgage brokers themselves who manipulate the figures to con lenders into making loans on buy-to-let properties to investors and even to first-time buyers who could not qualify for a home loan, but can get one if the application is presented as a buy-to-let rather than a primary residence.

The counterattack by lending institutions trying to avoid ‘bad’ loans includes cracking down on buyers who turned their residence into a rental without notifying the bank.  However, the problem with that approach, which involves higher interest rates and payments, is that it may mean foreclosing on those who can’t pay the additional amounts, even though the payments were up-to-date at the original terms.