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Last Updated: Wednesday, 11 February, 2004, 09:20 GMT
Self-cert mortgages could skew market
Many lie about their income in their mortgage application
Could you believe that a bank would invite customers to defraud it? It may sound incredible, but that is what some of Britain's biggest mortgage lenders have in effect been doing.

As a result, a flood of illicitly obtained mortgage money may have been pouring into homeowners' pockets, boosting both house prices and consumer spending.

The Money Programme started investigating mortgages last year.

After months of undercover work, our film "Mortgage Madness" finally answered one of the great puzzles of the British housing boom: How some people were managing to meet the soaring cost of housing.

The answer was so simple, we found it almost unbelievable.

Some major British lenders had changed their lending rules in a way which allowed borrowers to get far bigger mortgages than they were entitled to.

All a borrower had to do was to lie about how much they earned.

Prudent lending

Lying on a mortgage application form is a criminal offence.

But it is a crime some lenders had made disarmingly easy to commit.

For decades, the maximum a borrower could raise on a mortgage had been set as a multiple of income.

On a typical multiple of three-and-a-half times income, the most someone earning 30,000 would be able raise on a mortgage was 105,000 - that is 3.5 x 30,000.

The income multiple rule was rough and ready, but it was effective in stopping borrowers from borrowing more than they could afford and lenders from lending more than was prudent.

The rule worked because lenders used to insist that borrowers proved the incomes they claimed, either by producing evidence from their employers or, if they were self-employed, profit figures from their accountants.

Excessive lending

But in the increasingly frenzied scramble for business during the housing boom, Britain's biggest mortgage lenders increasingly began to offer a new kind of mortgage where proof of income was not required at all.

With these new so-called "self-certification" mortgages, borrowers simply stated their income and lenders made it clear they would not check the amount borrowers claimed.

Known in the trade as "self-certs" these mortgages, with their lack of income checks, made it simple for borrowers to lie about what they earned.

Having lied, the lender's multiple would be applied to the inflated earnings figure and the maximum mortgage a borrower could get would be increased.

Buying power

Last year when we visited Ealing, a house price hot-spot in West London, nine out of ten of the mortgage advisers we consulted recommended we should lie about our 30,000 salary, falsely boosting it to over 50,000 on our mortgage application form.

The effect of the lie was dramatic.

Instead of the 105,000 or so we could have raised on an honest mortgage application, suddenly we were being offered mortgages of around 185,000, giving us vastly more buying power to pump into the local housing market.

In Manchester house prices are lower, but nevertheless three out of the seven advisers we consulted suggested that we lie for a bigger mortgage.

When we visited high street branches of Birmingham Midshires, part of Britain's biggest mortgage provider, the Halifax Bank of Scotland group, three out of three of the advisers we consulted offered us self-cert mortgages of around six times our income for which we would have to have lied.

One of these advisers boasted of getting a client a mortgage of around ten times income by inflating his salary to over 100,000.

Market distortion

The potential boost to house prices from this extra cash was obvious.

How big it was depended on how many people were lying on self-cert mortgages and how much additional borrowing was being generated as a result.

On the day "Mortgage Madness" was broadcast, the Council of Mortgage Lenders, the lenders' trade association, were quick to play down any suggestion that lax lending by some of their members could have distorted the housing market.

It could not have happened, they insisted, because the self-cert mortgages were a tiny part of the market; less than 1%.

Large problem

This 1% figure was so wildly at variance with what we had found on the ground that we didn't believe it.

We began a second investigation to try to find out how many mortgages there really were where lenders did not ask for proof of borrowers' incomes.

The result of this second investigation is astonishing.

Far from being a piffling 1% or less of the market, it turns out it is huge.

One leading broker we consulted estimated that up to 30% of new mortgages are now issued without lenders asking for any proof of income.

Wall of silence

Trying to get an accurate estimate has not been easy.

We first tried surveying the top mortgage lenders, asking each how many self-cert mortgages they did.

The survey flopped because many self-cert lenders did not reply.

Instead they referred us back to their trade association, the CML, whose 1% figure we had found incredible in the first place.

When we finally got an answer from the CML, it turned out their 1% figure had only ever been a guesstimate.

In a splendidly circular argument, the CML told us they had not thought it necessary to try to find out a more accurate figure for self-certs because they did not think fraud was a serious problem meriting such work.


Meanwhile, the Financial Services Authority, which had been investigating self-certification mortgages following our first programme, came out with an estimate of their own: That self-cert mortgages were around 6% of the market.

6-7% is vastly bigger that the CML's 1%, but it still seemed far lower than we thought possible from our first investigation.

Then we came across another kind of mortgage where proof of income is not required which seemed to us to explain the difference between the FSA's 6% estimate and what we believed we had found.

Mostly designed for people who can put down a 25% deposit or more, typical for second time buyers, these mortgages are called "fast-tracks" because, without proof of income, they are far quicker to process than traditional mortgages.

But, as with self-certs, not asking for proof of income means fast tracks are also open to abuse.


We were sure we were on the right track when it turned out that half the self-cert mortgages we had been offered in Ealing were in fact fast-tracks.

The lender offering them, Northern Rock, is the seventh biggest provider in Britain.

Northern Rock were quick to point out an important difference between fast-track and self-cert mortgages.

Though neither requires proof of income, with fast-track mortgages lenders reserve the right to ask for proof of income if they choose.

The right to check might seem to make it far harder for borrowers and brokers to lie, compared with self-certs.

Surprisingly, it seems, that is not the case.

Brokers told us that it is easy to get round the checks most lenders make on fast-tracks.

Checks are few and far between and, even if one is asked for, it is easy to close the case, tell the lender the borrower is not proceeding with the mortgage, and then try to borrow from another lender.

New title

Lenders have other checks: For example, comparing the amount a borrower claims to earn with the job they say they do.

It is easy to get around that as well.

A deft change of job title, say from "nurse" to "medical staff", will easily justify a far higher income on the application form.

But the over-riding reason why many lenders seem not to be concerned about rooting out fraudulent applications is the size of the deposit a borrower has to put down to qualify for a fast-track or self-cert mortgage.


If everything goes wrong for the borrower and they can no longer meet the payments on a fraudulently obtained outsize mortgage, the lender is unlikely to lose money.

Even if a borrower defaults, a lender can repossess their home and sell it to recover their money.

The deposit gives lenders a comfortable cushion against falling house prices since prices would have to fall by more than the deposit before a lender faced any loses.

Borrowers meanwhile would have lost their deposits and their homes.

Even if they wanted to know how many fraudulently inflated loans they have on their books, it would be hard for lenders to find out.

In their paperwork, falsely inflated incomes match the large mortgages they justify, so the lies are hard to see.

And, while they lend even more money - mortgage lending is now at an all-time high - there seems little motivation for lenders to probe too hard.

Mounting debts

But crucially, what reassures many lenders that there is not a serious problem with overborrowing through fraud is the level of defaults and repossessions which are now running at their lowest level since the last housing recession in the early 1990s.

That picture may be about to change.

Last week the Department of Trade and Industry published some disturbing statistics.

Household debt now stands at 134% of income, a record figure.

The number of personal bankruptcies has increased by 30% on a year ago and is now at its highest level since records began.

Most ominously for the housing market, a Financial Services Authority survey published last month found that with a 1% rise in interest rates 44% of mortgage borrowers said they would be struggling with their borrowings.

Since that survey was undertaken last September, interest rates have already risen by half a percentage point and are forecast to go on rising.

If some mortgage lenders have been living in a bubble of complacency, the bubble may soon be rudely punctured.

The Money Programme on self-cert mortgages was broadcast on BBC Two on Wednesday 11 February at 1930 GMT.

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