There has been an explosion over the last few years of claims involving mortgage fraud. These are often high value and relate to multiple claims. Is the worst over? Can professional indemnity insurers sleep easy again?
The simple answer is no. A recent survey published by KPMG shows there were 21 cases of mortgage fraud in the courts in the first half of 2010 with a value of £96 million. This compares to 18 cases worth £24 million during the same six month period last year. In fact, the value of mortgage fraud claims for the first half of 2010 was nearly £20 million greater than for the whole of 2009!
Effectively the amount of mortgage fraud cases by value quadrupled in the first six months of this year. Given that such cases often involve claims against professionals, typically solicitors or surveyors, this news is a matter of concern to professional indemnity insurers.
Insurers will no doubt be hoping that most of the fraudulent loans from the pre-recession boom years have now been uncovered. However, given the long tail nature of conveyancing fraud losses, the high level of mortgage fraud claims could potentially continue for some time.
To a certain extent history has been repeating itself, as in the last recession in the early 1990s there was also a large upsurge in fraudulent claims. However, there is also something different this time around. Recent years has seen a huge increase in the number of so-called “self-certification mortgages” where a potential borrower certifies their own income to obtain a mortgage. According to the FSA almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a borrower having to verify their income. Since these mortgages failed to test the borrower’s ability to pay, they have proved susceptible to abuse resulting in large losses to lenders materialising initially when the bottom dropped out of the housing market.
In order to minimise these potential losses, the lenders turned to any professional involved in the transaction, whether it be a solicitor and/or a surveyor. This has fuelled a large number of the lender claims now being seen.
However, some good may have come out of the wider financial crises which may see a reduction in future lenders claims in the volumes now being seen. As part of a major review by the FSA of the UK mortgage market, it announced proposals in July 2010 to effectively ban self-certification home loans. If those proposals come into force a lender will have to verify income on all mortgage applications.
Unfortunately, there is no immediate end in sight for mortgage fraud claims arising out of the more “relaxed” lending of recent years and insurers will have to await developments. Insurers will no doubt be continuing to monitor those professionals involved in conveyancing closely, and where appropriate, adjusting the premium required in order to manage their exposure to potential mortgage fraud.
ST0P PRESS – Jackson review
Major reform of claimants’ legal costs may be on the horizon. Lord Young published a report in October 2010 on the compensation culture. Within the report was a recommendation to adopt Jackson LJ’s proposals “as soon as possible”. The Jackson recommendations included that CFA success fees and ATE premiums will cease to be recoverable from the losing party (along with a 10% increase in general damages).
The Prime Minister himself wrote the foreword to the report and has stated that he agrees with all of its recommendations. Lord Young welcomed the proposed Ministry of Justice consultation on implementation of the Jackson Report proposals. This consultation opened on 15 November and closes on 14 February 2011. For details, see http://www.justice.gov.uk/consultations/jac kson-review-151110.htm.
There is therefore now a real possibility that Jackson LJ’s proposal will be implemented, possibly in 2011. The likely immediate effect for insurers will be a short term surge in claimants acting under CFAs before the anticipated new legislation comes into effect.