Horses and stable doors come to mind in considering new proposals from the Council of Mortgage Lenders on cracking down on mortgage fraud. From September, lenders will begin requiring property developers to start disclosing any incentives or discounts they have offered buyers of new-build properties.
The idea is to put a stop to what has become a widespread practice, particularly in the new-build flat sector of the market, previously so popular with buy-to-let investors and now so exposed to falling house prices. Lenders have repeatedly been caught out after making mortgage advances based on the headline price of flats, only to discover later on that the buyer actually paid quite a bit less thanks to a discount that the developer didn't quite get round to declaring.
The scam is just one of a range of mortgage frauds that City of London Police thinks cost as much as £700m last year. The frauds have continued: Bradford & Bingley, for instance, was forced to write-off £15m of fraud losses in its first-quarter trading update published last week.
There's nothing intrinsically wrong with the CML's proposals. But it's astonishing that it has taken lenders so long to take this first meagre step towards mortgage fraud. And given the crisis in the housebuilding sector, there will in any case now be far fewer new-build properties for developers to sell, with legitimate valuations or not.
Moreover, the delay in tackling this type of mortgage fraud has played a part in the collapse in value of new-build properties. Individual lenders became so concerned about the dubious practices of some developers that many withdrew from this part of the market. This is one reason why the price of new-build flats has fallen so sharply.
The victims of the fraud include lenders themselves, inadvertently hoodwinked into lending more money than the collateral justifies, but also the buyers of these properties. Many of these buyers, whether they've bought places to live in or as buy-to-let investments, now face the spectre of negative equity. Worse, they may only discover the problem when forced to sell – a potentially disastrous revelation in the context of rising borrowing costs.
There's no good reason why the CML, in concert with organisations such as the Royal Institution of Chartered Surveyors, could not have taken action against rogue developers two years ago, when the first instances of the scam began coming to light (Portman Building Society, now subsumed into the Nationwide, was warning about the problem as early as 2005). The delay will prove to have cost both lenders and borrowers dearly.
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