mortgage fraud

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    From a Yahoo Group:

    031030 House prices

    If there was any doubt left that the once famed honesty of British financial services had completely vanished, it was destroyed last night by the British Broadcasting Corporation in a short programme which recorded the results of investigative journalism into the mortgage industry.

    Intrigued that house prices were still rising even when experts thought they should be falling caused the BBC to undertake this study. What they found was that people were lying about their income in order to get larger mortgages than the prudential rules of the lenders allowed. They found that people were being encouraged to do this by the mortgage advisers who work for the estate agents, and they also discovered that the lenders' front line staff, though probably not their top executives, were conniving in the frauds.

    It has always seemed to me to be a daft thing to do to seek mortgage advice from the vendor's selling agent. Naturally the agent has an incentive to get the deal through, and at the highest price, as it increases commission income. Agents know that house prices depend entirely on how much one can borrow to buy a house, so they found a way of increasing the amount that could be borrowed.

    The BBC's under cover reporter pretended to have an income of £30,000, and able to pay a deposit of £25,000. Normal prudence would allow a loan of £90,000. As no property in the area was priced at below £115,000, they knew something funny must be going on. Some time ago the lenders decided that they would deal with the problem of the self-employed being unable to prove their income level by allowing them to "self-certify" their income. In return they would insist on a deposit of at least 15 per cent, and the interest rate would be higher. As this gave the lenders a chance to increase income and to pay higher rates to their depositors, they had a big incentive to turn a blind eye to fraudulent use of this concession. People who were not self-employed were advised to self-certify and lie. Staff at the big financial institutions are no doubt nowadays all subject to "management by objectives" and are paid bonuses dependant on whether they meet targets. As I know from close experience of this system, even very honest people will find it hard to resist this pressure. (In case there is doubt, I did myself resist.)

    The BBC found that nine out of ten estate agents in a district of West London employed mortgage advisers who advised applicants to use the self-certification method and to state their incomes were higher than the truth. The investigator was advised variously to state a figure of £52,000 to £56,000. One adviser said he had himself committed the fraud. In an area with much lower house prices, Didsbury in Manchester, the BBC found there was still a significant level of fraud.

    People who go in for this fraud cook their own geese, as they push up prices against themselves, but what can the individual do when the fraud is so rampant?

    The BBC then enquired as to where the funds were coming from. One source was HBOS, Britain's biggest mortgage provider with one quarter of the market. The bank was formed by the amalgamation of the Bank of Scotland (incorporated by charter in the 18th century) and the old Halifax Building Society, a former mutual once famed among professionals for intransigent bureaucracy and stodgy principles, but also the biggest building society in the world. Bank of Scotland in recent years has been a stock market darling for its "go ahead American style management." Halifax has in recent times been advertising that it pays "EXTRA, Extra," with effective use of a charismatic goggle-eyed black manager and some minor pop star's singing voice.

    This is not in my view the only reason for the high level of house prices, but it is without doubt a very significant factor as it was clear the fraud was affecting at least a third of house sales in key areas.

    Todays; press has nothing about the programme, shown at 7.30 last evening, but that may be because the BBC gave no private viewing to the press before the broadcast.

    No doubt the affair will result in a bout of ill-directed and silly regulations, but all that is needed is to stop the practice of incentivising staff in areas of business where honesty is important. Selling agents must not be allowed to advise purchasers.

    I nearly forgot, the country's largest estate agency business was involved!

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