According to accountants BDO Stoy Hayward, mortgage fraud will cost the UK a minimum of £1bn.
Buy-to-let has been the most fertile ground. Bradford and Bingley, the now nationalised lender, has written off £271m and the bulk of Chelsea Building Society’s £53m of declared bad debts (half year to 30th June 09) was in its buy-to-let book.
How does such a fraud work? According to a piece by Philip Aldrick of the Daily Telegraph, a scheme could be as follows :-
* One landlord would, for example, put up £150,000 to buy a group of flats for £1m under a typical 85% mortgage offer. Keeping the properties in a “group”, he sells them on for £1.2m
* The group is a collection of landlords brought together by an intermediary with the collusion of lawyers and valuers
* The flats are then sold on again for £1.5m before a final deal at £2m
* Each sale transaction is accompanied by a false valuation
* The mortgage lender (say Bradford & Bingley or Chelsea) puts up 85% of the final price or for these examples £1.7m which is of course £700,000 more than the initial valuation
* The flats are ultimately sold within the group for £2m and the consortium has never invested more than the initial £150,000
* The profit after tax of about £400,000 is split between buyers, sellers, valuers and lawyers and the intermediary
* The actual fraud will be large scale
* Fraudsters move their profit off-shore and declare bankruptcy
* The lender is left with properties with genuine valuations as little as half the mortgage value
Something must have been a bit lax somewhere, methinks.