Organised crime syndicates have been targeting residential and commercial property in increasingly sophisticated mortgage frauds using corrupt or compromised professional advisers, experts are warning.

They fear that the predicted slow-down in house prices, exacerbated by the Northern Rock crisis and the credit crunch, could expose multi-million-pound frauds involving hugely overvalued and, in thousands of cases, deteriorating properties that could leave the market highly unstable.

There is growing concern that there has been a systematic attack on the mortgage system by linked frauds. The Serious and Organised Crime Agency says that gangs are using corrupt or negligent solicitors, accountants and financial advisers as part of a fraud “infrastructure”, while the Serious Fraud Office has raided several offices, including law firms, as part of its investigation into an alleged multimillion-pound mortgage ring in the Midlands.

The Financial Services Authority, which has been investigating poor lending practices in the sub-prime market, set up an early warning system on possible frauds with lenders. It has received about 200 tip-offs, 32 of which were strong enough to warrant further investigation.

Warning signs that solicitors are being sucked into facilitating mortgage fraud – some knowingly, others through ignorance or negligence – are being monitored by the Solicitors Regulation Authority. According to Mike Calvert, head of its forensic investigations, a quarter of its inquiries involve allegations of mortage fraud and the percentage is rising.

If there is a surge in losses on the loan books of banks and building societies, lenders will look to sue lawyers and other professional advisers to recoup their losses, which happened after the last wave of mortgage frauds exposed by the property crash in the late 1980s.

Simon Chandler, an insurance and reinsurance partner at the Bristol office of CMS Cameron McKenna, says that the frauds cover a broad spectrum from individuals’ exaggeration of income through to organised crime syndicates. “The opportunities for fraud have been fuelled by aggressive lending strategies by banks seeking market share. The sub-prime, buy-to-let and new-build sectors have been key targets of the fraudsters, who have also turned their attention to the commercial sector.”

Key features, he says, include widespread use of forged or stolen identity documentation; the use of internet-based sites to create fraudulent lending applications; the use of “mortgage mules”, who lend their identity for a fraudulent transaction in return for money; and the systematic bribery and intimidation of professionals, including valuers, lawyers and accountants.

Regulators and law enforcement agencies have failed to inhibit the growth of this type of fraud, Chandler says. “Police forces have been forced to reduce their fraud departments to respond to pressure to target terrorism, drug and street crime, while regulators have moved towards more light-touch principles-based regulation, with fewer intrusive inspections.”

Crime gangs have used the opportunity to establish their own trusted panels of professionals to facilitate the frauds, he says. The scam begins when the fraudsters recruit a mortgage mule to buy their property, knowing lenders will typically offer offer 90 per cent loan to value ratios. Their tame valuer overvalues the property by anything from 30 to 100 per cent. The transaction goes through with the help of the solicitor. The borrower doesn’t pay the mortgage and the property is repossessed and put up for sale when another gang member buys it and starts the cycle again. He has experience of half a dozen gangs, of various nationalities. “Mortgage fraud gives street-level criminals access to more sophisticated revenue-producing scams than they dreamt of ten years ago,” he says. “But it will be effectively dealt with only by a coordinated response, which has not yet happened in the UK.”

From December, money-laundering regulations set out stricter requirements for solicitors dealing with clients whom they have not met personally, including making sure payments come from the client’s own bank account. “A solicitor’s independence can be compromised if he or she just follows a broker’s instructions without checking that the purchaser is genuine,” says Calvert, who adds that there needs to be a cultural change in the profession. “Historically, the client is always right. But solicitors must recognise that they are being targeted so they need to protect themselves from their client, which is an alien concept.”

Sarah Clover, head of the solicitors’ professional liability group at Barlow Lyde & Gilbert, acted for the profession in the Nationwide managed litigation that followed the last mortgage fraud crisis and established the legal principles as to lawyers’ liability. However, she says it also established the defence of contributory negligence where lenders had been reckless which, in the light of recent aggressive lending policies, is likely to prove a key issue in litigation arising this time.

Over the past three months, there has been an increase in the number of solicitors alerting their professional indemnity insurers that lenders want to see their files on transactions – usually a prelude to a claim. Anna Fleming, a solicitor and the claims manager of Zurich Professional, says: “The signs are that lenders are gearing up for an onslaught on solicitors if the losses come home to roost. I will be very depressed if it turns out the profession hasn’t learnt its lesson.”

Meanwhile, the property market is watching and waiting, says Orla MacSherry, property partner with Macfarlanes. “The pressure to do deals puts solicitors under pressure to negotiate very borrower-friendly, covenant-lite documents,” she says. “Banks will be eyeing with some concern deals that they signed up to in the bumper years.”

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