What is mortgage fraud and when does it occur?

Mortgage Fraud

Mortgage fraud will occur when individuals will defraud a financial institution or a private lender through the mortgage process.


What is meant by fraud?

The criminal offence of fraud is provided for in the Fraud Act 2006 which covers fraud by false representation and by failure to disclose information where they may be a legal duty to disclose the information.

What is meant by false representation?

False representation can be made explicitly by stating false facts or implicitly by not correcting false facts.

What will happen to the value of a mortgage obtained through fraud?

The value of a mortgage obtained through fraud will be treated as proceeds of crime under the Proceeds of Crime Act 2002. As a consequence of this if an individual takes possession of this money or enters into an agreement in relation to the transferring of the money will be seen to have committed a money laundering offence.

What are the different types of mortgage fraud?

Mortgage fraud can initially be split into two distinct categories:

  1. Opportunistic mortgage fraud

  2. Large scale mortgage fraud

Opportunistic Mortgage Fraud

Opportunistic mortgage fraud occurs in relation to individual purchasers of a house through a mortgage scheme who take the opportunity to get a higher mortgage than they should be entitled to get. The way they do this is by providing information which is untrue or misleading or by failing to provide certain information which by law they would be required to disclose.

Opportunistic mortgage fraud will often occur when incorrect or misleading information about the following is provided:

  • The individual’s identity

  • The individual’s income

  • The individual’s employment

  • The individuals other debt obligations

  • The other sources of funds for the purchase other than the mortgage

  • The value of the property

  • The price to be paid and whether any payments have been or will be made directly between the seller and the purchaser

Large Scale Mortgage Fraud

Large Scale Mortgage Fraud as the name suggests is committed on a larger scale than opportunistic mortgage fraud and often involves several different properties, often being committed by criminal groups.

Are there any specific markets which are particularly susceptible to large scale mortgage fraud?

Currently the buy-to-let property market is extremely susceptible to mortgage fraud. This is in relation to both new-build apartment buildings and large scale renovation projects where criminal organisations will often be involved in the purchase of such complexes.

How does large scale mortgage fraud come about?

Often large scale mortgage fraud will come about according to the following steps:

  • The value of the property will be an inflated value and the mortgage will be sought for the higher inflated value

  • The nominated purchasers who are taking out the mortgage will often have no beneficial interest in the property and will often be made up

  • In many cases the mortgage payments are not met. Often when this is the case the properties deteriorate and are simply used for other criminal activities – these activities often centre on drug production, prostitution and unlicensed gambling

What will happen when the bank tries to get payment for the mortgage?

Often when the bank seeks payment for the mortgage the procedure will begin again as the criminal group will often raise another mortgage with another bank through another made up purchaser. This means that they will have effectively sold the property back to themselves.

It is usually the case that the second mortgage is inflated enabling them to pay off the first mortgage making a vast amount of profit in the process. A criminal group will often repeat this process many times – this is where the real money is made out of mortgage fraud.

What will happen when the bank eventually forecloses on the property?

When the bank eventually forecloses on the property due to the state of disrepair it has been left in following the purchase the property will be worth significantly less than the current mortgage.

Is there anything else which I need to be aware of?

The following issues will also need to be examined when dealing with cases of large scale mortgage fraud:

  • Use of non-bank lenders

  • Use of existing corporate structures

Non-bank lenders

Private sources of funding are also available for the purchase of property. Probably one of the best examples of a private source of funding is a property club which will lend money to purchasers of investors. Criminal organisations will often seek money from property clubs in relation to purchasers of land abroad which in actual fact is simply a field with as yet no property built on it.

Existing corporate structures

In many cases fraud will be achieved by selling the property between related private companies rather than made up individuals as is detailed above. Often a property will be sold many times between off-shore companies at continual inflated prices meaning that by the time the mortgage is come to be sought from the bank or other institution the price is vastly inflated.

Mortgage Fraud and the Economic Downturn

In the lead up to the economic downturn it has been felt that there have been many cases of mortgage fraud – some of which are still not yet apparent. As a consequence the National Fraud Authority (NFA) has been warning lenders that they must continue to combat the crime as we come out of the economic downturn.

During the economic downturn the availability of products that attract mortgage fraud such as desirable buy-to-let properties decreased but as we start to come out of the recession their availability will again increase. The NFA measures the annual cost or mortgage fraud at £1 billion.