Mortgage Fraud

Better still, for once I've actually had the whole weekend off. I was meant to be doing a jury trial last week, tailgunner on a wee stabbing, but as it turned out the case ahead of it overran so I spent most of the week unable to make client appointments, in case my trial started,  but with time on my hands to clear my desk.

So really, really, the last thing I wanted to be having to do today was write a blog about mortgage fraud.

But needs must. 

A week past on Sunday the Sunday Times carried an article about the business activities of Michelle Thomson, one time front woman for Business for Scotland and now the SNP Member of Parliament for Edinburgh West. It was unattractive stuff, highlighting how her property company had bought up houses and flats from distressed and desperate sellers at knock down prices. These were hardly the actions of a leading member of a supposedly social democratic Party. So the hypocrisy was enlightening but hardly unique in Nationalist ranks.

And, on the other hand, that is of course capitalism. Those with lots of money regularly can, and do, exploit that position at the expense of those who have little. That's certainly not something even the current Labour leadership is proposing be made illegal.

But there was something in that initial article that seemed to the informed eye a bit more sinister. That was the suggestion that, in some of the transactions involved, the price actually paid by Thomson was less than that declared to the Land Registry. "That looks very like mortgage fraud", I thought to myself but to be honest that was as far as I went. I was more focussed on preparing for my stabbing.

But then, yesterday, the Sunday Times suddenly put much more flesh on the bones.*

For they had found the anonymised findings of a case before the Scottish Solicitors Discipline Tribunal and had lifted the cloak of anonymity.

Now here I am going to have to get a bit (even more) boring and explain how various types of mortgage fraud work and who and how the perpetrator benefits.

The first relates to "false deposits". 

As you will probably know, in the aftermath of the banking crash, the conditions attached to mortgages tightened considerably.

In particular, purchasers were required to fund considerably more of the price from their own resources, a sum commonly referred to as the "deposit". This caused considerable difficulty in the market. There were good numbers of people, particularly first time buyers, interested in buying property but without the ability to raise the deposit.

So, I might be able to afford an £80,000 mortgage, but that didn't mean I could afford an £80, 000 house. For the lender, typically, at he height of the crash, would be prepared to lend no more than 80% of the price. So to buy my £80,000 house I could borrow no more than £64,000. I would need to find another £16,000 from my own resources.

But of course I could afford an £80,000 mortgage. So, here is the thing. What if I didn't buy my £80,000 house for a declared price of £80,000? What instead if I bought it for £100,000. Then, of course, I could use my full £80,000 mortgage. But, I hear you ask, if you didn't have £16,000 for a deposit how did you suddenly get £20,000? And, anyway, why would you pay £100,000 for a house only worth £80,000?

The answer to these two questions are, respectively, I don't and I haven't. I propose, with the assistance of a third party, either the seller themselves, or an intermediary looking to make a profit in the process, to commit a mortgage fraud. 

For one or other of these is going to "lend" me the deposit and once the money, combined with the mortgage funds has been tendered as the price, the seller is going to give them their deposit back.

To do this I must commit a fraud in two ways: Firstly, I have to fraudulently mislead the mortgage provider as to my possession of a £20,000 deposit and secondly I have to deceive them as to the true price I am paying, giving them in turn an inaccurate impression of the property's true worth. Meanwhile those providing the deposit, although not directly involved with the lender have almost certainly committed conspiracy to defraud, particularly if, as an estate agent or property developer, they were the instigators of it.

But of course this type of fraud has one major drawback, it requires the knowing participation of the seller.

So that is where "back to back" fraud comes in. It requires more than one principal participant but in this circumstance the seller is completely ignorant and innocent.

Again I will use the an £80,000 deal as an illustration although generally this operates with higher value properties. Mr innocent wishes to sell his property for £80,000. Fraudster one offers precisely that. But, with settlement on the same date, fraudster two then offers to purchase the same property  from fraudster one at a price of £100,000. Fraudster two then gets an 80% loan. Fraudster one never has £80,000. Indeed he or she never has any money. Fraudster two however hands over the full  £100,000 from which fraudster one pays Mr Innocent his £80,000 and proceeds to give Fraudster two the other £20,000 "back". Again fraudster two has committed the frauds outlined above but in this scenario fraudster one, although again never directly in touch with the mortgage lender, has also nonetheless participated in a conspiracy to defraud. 

Now there are two essential elements to both these frauds. The first element can be innocent. You need a valuation of the property at the level of the nominal price paid. For a percentage loan is always provided as the lower of the declared price or valuation. At the height of the slump however that wasn't difficult as for a considerable time surveyors continued, sometimes wishfully on other occasions........to overvalue property. 

The second element however can't be innocent. You need a bent solicitor.

For mortgage lenders aren't idiots. Or at least since the crash they haven't been. Any solicitor handling mortgage funds must comply with the standard conditions imposed by the Council of Mortgage Lenders. Two of these are particularly germane here. 

The first is that the solicitor must inform the lender and get their agreement to proceed if they know that the deposit is not being provided by the purchaser themselves. Obviously this can be entirely legitimate, where for example it comes from the purchaser's parents but where it is less easily explained, it is highly unlikely that the mortgage provider would release their funds. They intended to provide an 80%loan only. That's where we first came in.

The second is that the solicitor must inform the lender if the seller has owned the property less than six months. Again, there can be legitimate reasons for this, most commonly a catastrophic change in the sellers personal circumstance, but, again if the mortgage provider was informed that the seller had bought the property only that day and for a considerably lower price then again release of funds would be inconceivable.

But of course the lenders rely on the solicitor telling them. If at the behest of his client he fails to do so it is highly unlikely they would ever know.

Unless it is picked up by a routine Law Society inspection.

Which is what happened to Christopher William Hales, formerly a partner with Grigor Hales solicitors, Edinburgh.

As a result, it appears, of a Law Society inspection Mr Hales was found to have assisted in mortgage fraud in no less than thirteen transactions for which he ultimately appeared before the Scottish Solicitors Discipline Tribunal on 13th may 2014 and was then struck off as a solicitor.

It's all in the judgement which, despite its length I encourage you to read in full. Numerous examples of failing to inform lenders of undisclosed deposits, including examples of Mr Hales personally returning these to the purchasers, and several examples of back to backs, all equally undisclosed to the lenders.

But Mr Hales was not the principal actor here, he was simply the facilitator.

The principal actor, time and time again, was a woman referred to in the judgement as Mrs A. Sometimes she acts directly, on others she provides a third party deposit in exchange for a "fee".

And, thanks to the Sunday Times we now know that Mrs A is Michelle Thomson and from there, on reading the judgement, you can deduce that the others involved in the frauds include her business partner, their joint company and, occasionally, her husband.

Now, in May 2014, when the Tribunal decision was issued, Michelle Thomson was something approaching a national figure as one of the public faces of the SNP front organisation Business for Scotland. Indeed, at first appearance, one of the few genuine business people involved with that organisation, most of the others being little more than jumped up PR men. If her up to the neck involvement in mortgage fraud had come to light just three months before the referendum this would have been disastrous for Yes Scotland, for the SNP by association, but most of all for the economic credibility of the Independence cause. 

I've got a bit of knowledge however of how solicitors get drawn into mortgage fraud. It usually starts with agreeing to "bend the rules", for a valued client, "just this once". The problem is that once done there is no way back. For, once done, any future reluctance can invariably be met with the response from the client "it would be a pity if the lender, or the Law Society, found out about that first matter". After all, the client could probably maintain they didn't realise they were doing anything wrong. It's not the sort of thing the solicitor would have been likely to have confirmed to them in writing.

And that can be a problem in other walks of life. For example, a political Party reluctant to enrol an individual as an approved candidate could hardly face down a response that they had known of that person's character when the self same person had performed a previous valued service for them. Nor indeed could they take immediate disciplinary action once matters became public. "It wouldn't look very good if Paul Hutcheon got to know how long you've known about this".

But unless the findings of the SSDT are wholly inaccurate, and you will note that the facts were agreed by Mr Hales, Thomson personally is toast. The sentencing guidelines are here. It qualifies for what is commonly known as exemplary sentencing so she'll probably get several years in jail giving rise to an interesting by-election.

With Bill Walker the SNP got away with murder. I wrote about that at the time hereand here. It was simply unsustainable on the known facts that they were unaware of his history at the time he was selected as a parliamentary candidate. But the Nats simply stuck to that line and somehow got away with it. 

This time, once the dust settles, there must be a more thorough investigation as to who in the SNP knew what and when. The only pity is that this is unlikely to be before next May.