BMV property clubs...and Scams

Now we have the phoenix-like return of organisations selling properties which they claim are below market value. Too good to be true? Well yes, many of these schemes are scams

When it comes to mortgage fraud, we are aware of a variety of routes that are used to dishonestly obtain funds from lending organisations. These range from applicants providing falsified data, such as declaring inflated income figures, or concealing adverse credit data, through to not revealing true employment status information or applying for a residential mortgage for a buy-to-let investment.

In fact, the CIFAS FraudScape report (February 2010) confirmed that the supply of false documentation was the most common form of mortgage application fraud during 2009, accounting for 33 per cent of all cases.

The nature of fraud and indeed quantum intensifies as it moves away from being perpetrated solely by the applicant, but involves collusion with other professionals involved in the process.

An example of this includes the collaboration of unscrupulous individuals, such as a property developer, broker and conveyancer who join forces in order to ‘work the system’ for their own personal gains. Headlines surrounding probes into conveyancer-led fraud, and similar, have been more and more frequent over the last few years, as the likes of the Solicitors Regulation Authority, the Financial Services Authority and other industry bodies have taken a harsh line and increased their related investigations taking steps to prosecute or fine those responsible.

Other examples include fraudsters impersonating legitimate owners of unencumbered high-value properties, who have proceeded to obtain standard residential mortgages at low loan-to-value ratios, and pocketed the funds unbeknownst to the actual property owners.

The industry continues to work hard to combat mortgage fraud through adaptations to due-diligence processes and procedures, and the continual advancement of automated tools that support risk management and fraud detection.

Property clubs
A particular form of mortgage fraud in the ascendance, which has found a perfect opportunity in an uncertain market is that of professional property clubs.

We are reading more and more reports of the phoenix-like return of organisations operating scams to sell properties in a claimed Below Market Value (BMV), where the market value has been clearly inflated and the actual value of the transaction masked.

Naïve and/or predatory investors are tempted with the promise of making an impressive income via the purchase of properties without the need for a deposit, and sometimes even with the incentive of generating immediate ‘cash back’.

These clubs promote various advantages, with some suggesting that once a property has been purchased BMV, via a group of complicit professionals the buyer can then immediately remortgage at the higher market value and extract the difference; not declaring the selling price, nor declaring to the new lender that the property had just been purchased undervalue.

Others promote the ability to purchase numerous properties from an investment perspective, whereby the BMV properties are acquired without the need for a deposit, providing a healthy equity plus earnings from the monthly rental. All of these are generally undertaken by way of a commission fee to the arranging property club organisers, who are not directly involved in the mortgage application or mentioned anywhere in the resulting mortgage deeds.

Originally a few years ago, property clubs were centred around new build properties or ‘off plan’ investment developments. You could compare the format and techniques used by such clubs to those employed by timeshare operators. Typically an ‘Investment Seminar’ would be hosted by the group and they would provide details on a variety of investment potentials. A deposit would be obtained on a home that is yet to be built, and so the scam would follow, with the property club even organising the mortgage on behalf of the applicant through their ‘selected’ professional contacts. This worked for the groups whilst the market was ‘on the up’, however many later went bust when investment funding dried up and prices started to fall away.

Today, many new clubs are emerging which are concentrating their focus away from new builds and off-plan investments, but instead on repossessed properties or on distressed assets. These are typically purchased via auctions or by using a ‘sale and rent-back’ scheme. They are then sold via the clubs to investors as a BMV property and quickly flipped to release equity. Or, they are marketed as a buy-to-let opportunity with a tenant already in situ at the property – who is often the original owner of the property who is now instead renting (though not necessarily in a positive financial position to actually do so).

Property clubs are not regulated and while many may be legitimate, there are plenty out there overtly marketing the ability to ‘become property millionaires’ from a minimal capital investment. In return a property is offered for purchase at a substantial discount to the claimed market value, which is often given credibility with the promise of a “guaranteed RICS valuation”. Most models are based and marketed on the ability to generate quick returns if the property is quickly sold on at full market value.

A quick Google and you will find a wide range of sites that boast the ability for investors to receive a guaranteed discount off the lender’s valuation, which includes guaranteed buy-to-let mortgage products ready and waiting, and the opportunity to earn tens of thousands of pounds in equity in a single day. My father used to say “If it looks too good to be true, that’s because it probably is”, and although this thought must cross people’s minds when they come across such sites, you can certainly see why people are tempted to investigate further.

How to track property clubs
Property clubs are a growing concern for mortgage lenders, who are being duped into lending on properties with an unrealistic, over-inflated market value. Quest is currently monitoring over 1,000 properties, sites and organisations on behalf of lenders into this very issue, demonstrating the scale of what is being faced.

An example of a case that has been recently investigated involved a property in the North West of England, which appeared to be legitimately on the market at an advertised £150,000. The property in question was in fact offered for a BMV price of £112,500, but the lender was presented with a suggested valuation of £150,000 with an application for a 75 per cent loan-to-value (LTV) mortgage. This meant an additional sum of over £35,000 would have been lent on the property in question. When undertaking subsequent comparable searches, the ceiling for similar properties is still no more than £120,000, demonstrating the losses the lender would have faced in this instance.

Other alerts that have been raised by our Q-Guard fraud detection system include mortgage applications that were being processed for two luxury two-bedroomed apartments in the Midlands. The mortgage valuations that came through Quest each were valued at £85,000, however they were being sold by a property club for just £63,750. The catch here is that the loan amount was the same as the true purchase price, meaning the lender was effectively providing a 100 per cent LTV, even though the application was submitted as 75 per cent LTV. (Interestingly, on this particular case too, the initial outlay for investors on this property is less than £4,000 of which a majority is made up of the fee to the club, plus the investor also receives a ‘cash back’ incentive of almost £1,000 on completion.)

The key for mortgage lenders is to ensure appropriate diligence checks are in place to track market valuations against true comparable data, using historic valuation data and current AVM data, through the likes of Calnea, which will ensure that any suspicious characteristics are alerted prior to the application progressing any further.

And, with reports that 2011 will be another uncertain financial year, including predictions from industry analysts that house prices may fall between 2 and 10 per cent, we are set for another potentially turbulent year in the mortgage fraud space as individuals, organised groups and property clubs take advantage of the uncertainty for their own unscrupulous gains.

Industry initiatives
Quest contacted several industry organisations to find out from them what initiatives are underway within their organisations, in conjunction with the industry, to help combat mortgage fraud.

Solicitors Regulation Authority
Steve Wilmott, director of intelligence and investigations, Solicitors Regulation Authority, said: “The SRA has a comprehensive programme to prevent and detect mortgage fraud. We work closely with the profession, the lending industry and their representative groups including the CML, the police, SOCA and other law enforcement agencies and regulators. We are members of the National Fraud Authority mortgage fraud working group and regularly exchange information and intelligence with its members.

“We have set up a dedicated mortgage fraud process that lenders can use where reports of mortgage fraud are assessed daily and allocated to intelligence officers and investigators for further action. We have designed and developed formal intelligence processes and an alert system and significantly developed our intelligence capacity which is now serviced by intelligence officers who are mainly ex fraud squad, analysts and researchers. We have also enhanced our investigation function to ensure that all allegations of mortgage fraud are dealt with as quickly as possible and the appropriate action taken which often includes the involvement of other agencies including law enforcement.

“We meet with lenders regularly, on a one-to-one basis and have recently introduced a quarterly meeting with major lenders where intelligence, information and concerns can be shared. In addition the SRA has presented at numerous conferences on the steps we have taken to prevent and detect mortgage fraud. These include those arranged by the CML, BBA, BSA, Law Society and others.

“The SRA has also significantly enhanced its perimeter control to prevent those determined to facilitate or commit crime from entering the profession. We have introduced a vetting programme in an incremental basis commencing with students and those new to the profession before progressing on to those in the profession with effect from later in 2011.

“The result of our efforts have been palpable. We have dealt with a number of incidents, particularly in 2009 of serious attempts to use the profession to facilitate mortgage fraud, by proactive working we have saved the lending industry in excess of £35 million of monies that was at risk. Mortgage fraud reports to the SRA over the past six months have been at a historic low.”

Council of Mortgage Lenders
Jayne Chichester, press officer at the Council of Mortgage Lenders, said: “Solicitor fraud is one of the key issues affecting the mortgage industry this year, and we will continue to work with other bodies in taking the right measures to tackle the problem in 2011 – and beyond.

“This year, following pressure from lenders, the SRA is promising to enhance entry, information and reporting requirements to ensure there is more rigorous scrutiny of those entering the profession and regular checks on the standards of current practitioners. We hope that this will be complemented by the Law Society’s conveyancing quality scheme (CQS), with both – in theory – leading to tougher standards. But lenders will want to see that the SRA measures and CQS prove themselves, deliver the hoped-for improvement in standards and make it harder for fraudsters to operate.

“The SRA is also planning to implement its new outcomes-focussed regulation in October. Lenders have voiced concerns over this approach, in particular about the risk of a lack of clarity surrounding the rules. Their worry is that unscrupulous firms could exploit loopholes not covered clearly enough by explicit rules, which could lead to commercial clients, including lenders, suffering detriment.

“The CML, in conjunction with HM Revenue and Customs, has developed an income verification scheme for lenders. So, firms dealing with a suspected fraudulent application will be able to go to HMRC to verify whether there is a record of the borrower having an income, and if it matches the figure on the application. A pilot is currently running and, once complete, the scheme will be open for lenders to sign up at their own cost.

“The CML is also discussing with the National Fraud Authority the possibility of an industry-funded police unit to tackle mortgage fraud. In some instances, lenders have been concerned about police resources for tackling fraud – particularly in complex cases extending across different police force areas, involving substantial sums of money.”