Fraud: are you protected?

by Eddie Goldsmith

Bradford & Bingley is the latest lender to have been aff ected by fraudulent activity in the housing market, but what does it mean for agents?

Bradford & Bingley is the first lender to openly admit that it has been affected by fraudulent activity in the housing market. As part of its results announcement for the six months to June 30 2008, the bank revealed that it has been forced to take an £18m impairment charge to cover potential losses resulting from the activities of criminal gangs and other fraudsters.

Fraud is a growing problem, which the Association of Chief Police Officers estimates is costing lenders at least £700m a year. Other industry experts believe this is a highly conservative estimate and that the real figure could be nearer £7bn.

Either way, the problem is significant and unlikely to disappear in the near future, so lenders are doing everything within their powers to deter potential fraudsters.

Mortgage fraud encompasses everything from organised gangs of criminals involved in drugs manufacturing to illegal immigration, money laundering and the falsification of property valuations. All of these activities are serious offences and have the potential to put the perpetrators behind bars.

As far as estate agents are concerned, there are those who are involved in activities, which they know are fraudulent, such as colluding with lawyers, mortgage brokers and valuers to deliberately deceive lenders about property valuations.

I don't want to focus on these activities within this article, as they are clearly illegal, and any agent who is knowingly involved in such activities knows the possible consequences.

Instead, I want to focus on the potential for unsuspecting agents and valuers to inadvertently become involved in activities which have the potential to land them in hot water. These include issues such as incorrectly valuing new-build properties and charging fixed fees rather than the more recognised percentage of a sale price.

New-build valuations

One of the initiatives recently implemented to help assist the valuation of new-build properties has been the introduction of new valuation ules issued by the Council of Mortgage Lenders and the Royal Institution of Chartered Surveyors. They require developers and builders to complete a 12-question form and reveal if they are offering
buyers incentives such as cashbacks, fitted kitchens or free legal fees.

The aim is to ensure discounts and other incentives are fully disclosed because the overvaluation of properties has not only been a growing problem in recent years, but one which has caused lenders to lose faith in the new-build sector of the market.

If lender confidence can be restored, then there is a greater chance that they will be willing to reopen the flow of funding into this market
sector in the future.

Over-valuation

Correctly valuing any property in a falling market and avoiding future accusations of overvaluing is an equally pressing issue. The problem is that valuing a property has never been a precise science, which is becoming a contentious issue in the current downturn.

The introduction of the Consumers, Estate Agents and Redress Act in July last year makes it easier for consumers to lodge complaints against agents if they have a grievance, so agents need to ensure they can prove why they have agreed each valuation. This means maintaining accurate records and having clear procedures in place which everyone understands and, where necessary, ensuring there
are supporting comparable valuations on record.

Fixed fees

Which brings us on to the issue of fixed fees. The Ombudsman for Estate Agents recently revealed his concerns about fixed fees, stating that the issue is particularly serious where the property has been overvalued - either deliberately or carelessly - and sells for significantly less than the asking price, and where there were no supporting valuation comparables.

He states: "To avoid disputes and dissatisfied clients in relation to this matter, my message is that the property valuation must always be
supportable but reflect the market situation and the fee must be openly described as fixed irrespective of the price finally achieved for the property."

I will look at the issue of fixed fees in more detail in my next feature, so for now remind yourself and your staff about the dangers of allowing your business practices to become vulnerable to future legal claims.

The issue of fraud places even greater emphasis on the need for agents to tighten their procedures to ensure they do not inadvertently find themselves on the wrong end of a legal claim or, worse still, a criminal charge.

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