Page last updated at 21:50 GMT, Wednesday, 23 July 2008 22:50 UK

Are mortgages as safe as houses?

By Kevin Peachey
Personal finance reporter, BBC News

When investigators from the City watchdog looked through the files at PMSG Insurance, their eyes were drawn to details of customers' incomes.

Door key
The FSA is cracking down on mortgage fraud

The figures, the Financial Services Authority (FSA) says, had obviously been inflated.

Darlington-based PMSG said that its priority was giving customers what they wanted, with affordability and suitability of a mortgages simply a secondary consideration.

It was enough to land the group with a 35,000 fine.

While this was just a case of poor advice, other mortgage brokers have already been fined or banned from the industry for being implicated in making actual or potentially fraudulent mortgage applications.

Philip Robinson, director of financial crime and intelligence at the FSA, says mortgage fraud is a "serious and widespread problem".

How widespread? Well, that depends on who you listen to.

The Association of Chief Police Officers (Acpo) puts losses from reported cases at 700m a year, and growing. Lenders dispute that estimate, claiming it includes some double-counting.

And Jonathan Phelan, the man who heads the FSA's team of investigators, says he just doesn't know.

Cracking down

Whatever the extent of the fraud, he is confident that it is becoming more difficult to get away with it.

We mean business in terms of kicking people out and fining them
Jonathan Phelan, FSA

The FSA took over mortgage regulation in October 2004. Two mortgage brokers were banned for fraud in 2006, six were kicked out last year and 17 have already suffered the same fate in 2008.

Mr Phelan says, in regulation terms, that the latest number is "massive".

There are another 24 cases under investigation and 100 more potentials in the pipeline, he adds. That is still a tiny minority of around 5,000 regulated mortgage brokers.

"We mean business in terms of kicking people out and fining them. The intention is to increase the deterrent," he says.

"We want to rid the industry of this. It is a heinous crime."

That may be an exaggeration, after all, it appears to only be mortgage lenders losing out.

Mr Phelan disagrees. This is not a victimless crime, and often it is the most vulnerable who suffer.

Modus operandi

The most common form of mortgage fraud is inflating the income of the applicant. Sometimes this is with the customer's consent, sometimes not.

Mortgage application
Applicants should only sign when the form has been fully completed

This may be done by exaggerating overtime estimates, by inventing an evening job, or even by including forged payslips in the application.

The advantage to the customer is a bigger mortgage for a bigger property. The broker wins a larger commission.

Mr Phelan says he has seen plenty of cases where customers, encouraged to get the biggest possible loan, then hit financial difficulties and possible repossession when interest rates shift up and repayments become unmanageable.

Brokers who have been caught are generally one-man-band, High Street operators. Some have forged their own incomes - making investigations quicker and easier.

There was a glut of cases in Ilford, although Mr Phelan says there is no proof of a fraud ring.

Sadia Nasir, a director at London Mortgage and Financial Services, was the first broker to be banned and fined. She entered her own bank account details on four clients' mortgage applications.

In an unrelated case Gerard McStravick, trading as Fast Track Mortgage and Finance Consultants in Belfast, backed up applications with false pay slips.

And "mortgage introducer" Andrew Kiplimo, from East London, was banned after being accused of making up the pay and employment details on mortgage applications, and also of using false accounts and tax information.

Details of some cases have been handed on to police to investigate wider fraud allegations.

Industry action

Cases are investigated after they are brought to the regulator's attention by lenders.

Sue Anderson, of the Council of Mortgage Lenders, says there are a number of tests that lenders use, including matching previous knowledge of the applicant with information supplied or checking the plausibility of income claims.

Other checks are more elaborate, computer-based systems.

But, on 22 July, the FSA said the industry could be doing more to alert the regulator to potential fraud.

Only 35 out of the UK's 150 lenders have made reports to the authorities. Lenders should go the extra mile to report, rather than simply rejecting, suspicious looking applications, the FSA says.

Meanwhile, he urges customers to be on their guard.

Mr Phelan says that nobody should sign their mortgage application until it is fully completed and they are sure all the contents are accurate.

With the mortgage drought continuing and the housing market stalling, the opportunity for fraud might be squeezed as well.

But Mr Phelan believes there is a chance of some brokers becoming more desperate in a falling market, and giving in to the temptation of fraud.

If they do, he says, a heavy fine and a ban from the industry is waiting for them.


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