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Understanding Mortgage Fraud: Expert Insights and Legal Perspectives

Author: Azizur Rahman  3 May 2012
6 min read

It was shortly after the credit crunch hit us that we noticed a sharp increase in mortgage fraud prosecutions. That was simply because those schemes had been banking on the ever increasing property market. When the mortgage market collapsed and property values dropped banks were exposed and found a great deal of the money it had loaned over the boom years were not as firmly secured as they had been led to believe - this was especially true in the buy-to-let market.

The scale of mortgage fraud is truly massive. A report last year by the accountancy firm BDO Stoyward noted that mortgage fraud accounted for 20% of all known cases of fraud in the UK.

Types Of Mortgage Fraud

Essentially there are 3 different types of mortgage fraud. The first is simply lying on the application form but in a limited way. Typically a purchaser of a family home, not an investment, who lies about his income or a previous address in order to hide a bad credit rating. There has been an increase in this type of fraud no doubt because of the economic climate and the banks tightening up on their lending criteria. This type of fraud however can be committed by organised fraudsters targeting numerous lending institutions and can even include identity theft.

Secondly, there is the hidden incentives fraud. A few years ago it was common-place for the vendor of a property to offer e.g. cash-back or a gifted deposit in order to seal the deal. This was effectively a discount of the price. However, the mortgage would be obtained by the purchaser using the original, un-discounted, price. Clearly this was more of a grey area as the banks collateral held the same value though the size of its risk was larger. This practice was particular widespread in the new-build sector with developers offering all sorts of incentives to prospective buyers. From September 2009 the Royal Institute of Surveyors has directed its members (valuers) to ask vendors/developers for disclosure of any incentives.

The third type of fraud is the over-valuation fraud. This again was very prevalent a few years ago and the prosecutions have been feeding through the system since the credit crunch exposed the value gap. This type of operation however typically needs the co-operation of professionals, valuers and conveyancing solicitors - the Courts have never been busier dealing with such cases. Dealing with professionals gives defenders the opportunity to examine past practices and compare and contrast to the allegations about the persons conduct in the alleged fraud. Of course everything is dependent on the factual context but there is often scope for a professional to be misled or to have been negligent but not to have acted fraudulently - for example sole use of one particular valuer throughout numerous sales may not be a hallmark of fraud if it can be demonstrated that in fact that kind of practice was typical - also a forensic examination of professional and personal banking may show a failure to profit by alleged collusion in fraud.

The authors are currently involves in pre-charge negotiations in a case which, if it comes to charge, is likely to be the largest mortgage fraud ever. As complex as that case maybe the issues often boil down to simple market mechanics. We all know from experience that in the 1990s and early noughties the property market seemed like it was never going to burst - it just kept going up and up. Why was that? It was partly because of an insatiable desire by the banks to put their money into a market which was easy, which they regarded as a safe bet and which they thought would carry on booming forever. Lending institutions were falling over each other to lend money. This was especially true in the so-called sub-prime market.

Banks as 'victims'?

With that market reality in mind many thought they could get themselves onto the property market easily, and not only that but profit in the buy to rent market. The problem was that they didn't have the deposits. You need money to make money. How much of a problem was that in reality?

For a lie to be fraudulent it has to be both dishonest and operative - see eg R v Doukas [1978] 1 WLR 372. In other words if someone lied about their date of birth on a mortgage application form it might not be 'operative' - the money would have been loaned anyway whether the person was 35 or 41 years old. What about lying about cash-backs and inflated valuations? Of course the banks could never admit that such lies were not operative - the evidence in all cases suggests they were because the application forms ask for that information and for it to be given truthfully. But it is often the case that clients will say 'the banks knew', or 'I was encouraged to inflate my income'. There exists a certain discomfort amongst some in characterising the banks as 'victims'. This is where great care is needed in case preparation and tactics generally. A carefully crafted Defence Case Statement may result in the defence getting the ammunition to probe the lending institutions insistence on its victim status. What checks, if any were ever made to check the accuracy of information given on the forms, how often did the bank use its own valuers, how many valuations were required, how often would a valuation be matched exactly by the amount the bank was prepared to loan? These questions are not always appropriate to ask in every case - but there is a feeling, which will be shared by many jurors, that it was the banks reckless attitude to risk that got us into this mess in the first place - is it really too much to suppose that sometimes the banks turned a blind eye; that they took the easy money and that application forms were figuratively as well as literally just box-ticking exercises? This is always a matter for the jury - and in such cases great care and early preparation, especially in respect of disclosure, is required in order to put that defence forward properly.

Restraint and Confiscation

This is the before and after - typically a Restraint Order made under the Proceeds of Crime Act 2002 ("POCA") will be put in place in significant mortgage fraud prosecutions before the trial and often pre-charge. Confiscation follows conviction.

Restraint Orders can be challenged - and in many cases there is a lack of vigour in attacking these orders which can be overturned or varied.

An order can be challenged for instance where there has been material non-disclosure to the Court granting the order - remembering of course that the defendant will not be present, there is therefore an enhanced duty on the applicant to ensure he pleads the case fully and fairly; see e.g. Re: Stanford International Bank (In Receivership) [2010] EWCA Civ 137 where a Restraint Order was set aside for misrepresentation and material non-disclosure - though the Court re-imposed the Order after hearing full argument. See also now R v Windsor & Hare & Others (Eastenders PLC) [2011] EWCA Crim 143, 8/2/11 where the Court was especially critical of the Crown's lack of proper disclosure to the Judge granting the order. The more complex the case the more likely there is to be a Restraint Order - the flip-side is that the more complex the case the greater the burden on the prosecution to get it right.

It is often the case that confiscation under POCA leads to real injustice. Here though there is hope that in mortgage cases the Court of Appeal has redressed the balance. In R v Waya [2011] 1 Cr. App. R (S) 15 the defendant was convicted of mortgage fraud and received a non-custodial sentence. He was then made subject to a confiscation order of £1,110,000. This was the present value of the property he had obtained. The Court of Appeal said that, properly applying POCA, this was the wrong approach. The defendant had obtained about 60% of the value of the home by mortgage when he purchased it - thus the correct approach was to make an order for 60% of the present value. This at least allows the possibility of the defendant selling the property and paying off the order. Another complication in such cases is the position of the innocent spouse or family - always a very difficult situation and one which requires careful handling.


Mortgage fraud prosecutions are on the rise. They range from small individual cases to complex multi-property but-to-let and equity release schemes. Whatever the case the defence need to carefully consider their tactics at the earliest possible stage and act pro-actively throughout in dealing with the main case and ancillary matters such as restraint and confiscation which often cause just as much discomfort to the defendant and his family as the main criminal proceedings.


Jonathan Lennon is a Barrister specialising in serious and complex criminal defence case at 23 Essex Street Chambers in London. He is a contributing author to Covert Human Intelligence Sources, (2008 Waterside Press) and has extensive experience in all aspects of the Proceeds of Crime Act 2002.

Aziz Rahman is a Solicitor- Advocate and Partner at the leading Criminal Defence firm Rahman Ravelli Solicitors, specialising in Human Rights, Financial Crime and Large Scale Conspiracies/Serious crime. Rahman Ravelli are members of the Specialist Fraud Panel and have recently been ranked by Legal 500 as an 'excellent' firm with Aziz Rahman being described as 'first class and very experienced'.

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Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.

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