Huge increase in mortgage fraud, report police

City of London Police reported a 72% increase in mortgage frauds ‘one of the biggest areas of investigation'. According to the force, the number of investigations is expected to increase over the next year as frauds came to light and lenders sought to recover their losses.

Chelsea Building Society the second lender to be hit by mortgage fraud, estimated its losses at £41m, which pushed the mutual into a first-half loss of £26m. Bradford & Bingley the nationalised buy-to-let lender says it was the target of criminal gangs. They have set aside an extra £100m for potential losses from mortgage fraud.

Detective chief superintendent Steve Head, the chief of the City of London's economic crime directorate expects the number of investigations to rise, though lenders have been slow to report cases, which has taken the lead in tackling financial crime since 2003.

According to him, it is the mortgage lenders that are hit by the crime and they usually see it first. He said, “It would be good if the lenders were coming forward more than they are at the moment." Most of his work centres on potentially fraudulent mortgage applications or professional negligence on property valuations are driven by a booming property market.

The Royal Institution of Chartered Surveyors is investigating 10 complaints of valuation fraud, some in conjunction with the City Police. Simon Bevan, head of fraud services unit at BDO Stoy Haywood, believes that domestic mortgage fraud could top £1bn by the end of the recession and commercial property mortgage fraud could reach £5bn. The Financial Services Authority has banned 65 mortgage brokers in the last three years for mortgage fraud and levied fines totaling more than £1m.

How a mortgage scam works:

According to cases reported, gangs would buy a property deliberately at inflated price. Once the purchases appeared on the Land Registry website, they would be used as a basis for subsequent valuations, enabling the fraudsters to obtain inflated mortgage applications on other homes.

If a property was valued at £250,000 but was only actually worth £200,000, the gang could pocket the spare £50,000 to fund further deposits or to remove offshore. Fraudsters would usually include a solicitor and surveyor "on the payroll" to ensure that the funds from lender were siphoned off. Lenders would happily hand out mortgages without carrying out their own due diligence but relying on third party valuations.

Other scams involved enticing investors to buy new-build ­ properties off-plan. Homes would be advertised as high-specification and priced accordingly, but would be built cheaply, leaving investors and lenders with properties worth a fraction of the mortgage