With a decrease in the number of mortgages being approved by lenders, insurers must be alive to a potential rise in occupancy fraud by those looking to buy-to-let.
Over the past few years there have been significant changes in the mortgage market in terms of the volume and value of mortgages and product type availability.
There was an overall decrease in the number of mortgages made available by lenders, a decrease in the value of mortgages, reductions in the maximum amount loaned against property values and tightening of lending criteria such as increased credit scoring acceptance levels. In addition, a number of mortgage lenders have withdrawn from the market.
The cumulative effect of these changes made it more difficult for many people to obtain a mortgage than at any time in recent years. Products most significantly affected during this period included sub-prime, self-certified and buy-to-let mortgages.
According to the Council of Mortgage Lenders, 93 500 buy-to-let loans were advanced in 2009; compared with 222 700 advanced in 2008, representing a reduction of 58%. The value of buy-to-let mortgages in 2009 was £8.5bn compared with £27.2bn in 2008 and, while 2010 and 2011 have witnessed some recovery in the market, the buy-to-let mortgage sector is currently still running at a third of the levels seen in 2007.
Logic suggests that, as it becomes more difficult to obtain a mortgage product, an increase in first-party mortgage fraud can be expected. However, this theory does not manifest itself solely in relation to mortgages; it can be applied much more widely across most types of fraud associated with financial lending products including insurance. Occupancy fraud is causing concern to mortgage lenders as a direct result of the reduction in buy-to-let mortgage products and home insurance providers should share that concern too.
Occupancy fraud occurs when a borrower obtains a mortgage on a property with the intention to rent it out, but declares on the application form that they will occupy the property as their main residence. Their aim is to obtain a lower interest rate associated with a homeowner occupier mortgage and avoid paying the higher interest rates generally associated with buy-to-let mortgages.
In addition, the borrower is likely to disclose to the prospective home insurer that the insurance required is for a normal homeowner occupier, therebynegating the need for the insurer to attach the higher premium associated with that of a rental or landlord insurance policy. The insurer in question may not even provide cover for a property offered for rent and, under normal circumstances, would re-direct the property owner to a specialist insurer.
Non-owner occupier properties historically have higher delinquency rates and this increased risk represents one of the reasons for the higher interest rates and insurance premiums. In the case of occupancy fraud, both lenders and insurers are left over-exposed and, as a result, lend larger amounts or higher loan-to-value rates than they would normally for buy-to-lets. Insurers are particularly exposed as they currently receive a premium that is not commensurate with the risk.
However, the occurrence of occupancy fraud is not restricted to the point of application. The combination of changes to borrowers’ financial circumstances — brought on by economic problems, reduction in property value and the reduced prospect of selling their property — is forcing many homeowners to rent out their homes while living with family or friends.
Many do so with little or no regard for the change in the physical risk type, but more importantly some do this completely unaware of what the consequences of their actions might be.
Failure to disclose to an insurer the fact that a property is rented out could render the insurance policy void, which if only identified at the time of a loss could provide grounds for the insurer to repudiate the claim — consequently leaving the property owner exposed to the possiblity of losing everything.
Failure to declare a change in circumstances to a lender is classed as a form of occupancy fraud as the borrower is required to obtain a ‘consent to lease’ under the existing homeowner occupier mortgage or to be transferred to a buy-to-let mortgage: both of which command premiums from the mortgage lender and the insurance company.
Occupancy fraud is illegal. The property owner is deliberately misrepresenting the risk in order to obtain more favourable terms. In addition, the property owner may also be perpetrating tax fraud by not declaring the rental income gained on the property.
Occupancy fraud has traditionally been virtually impossible to detect, unless the property owner admits to renting out their property, but solutions are coming to the market including the use of a range of powerful databases, including bureau data, to piece together vital information about the policyholder. Highlighting multiple mortgages, links to other addresses and the presence of recent tenant verification checks carried out at the property address can be used.
The message is clear to both lenders and insurers alike: as the impact of the economic climate takes hold, it is
imperative they utilise technology and data to deliver greater insight. Otherwise, they leave themselves over-exposed to possible acts of fraud, whether driven through deliberate acts or circumstance.
John Cannon is head of product strategy for financial crime at Callcredit Information Group
- Top 100 Insurtech: Quarter four update
- Charles Taylor bolsters liability team by hiring senior sextet from Vericlaim
- Gallagher Bassett acquires claims management firm
- Roundtable: Is a single customer view taking off in insurance?
- Finch and ICB owner on acquisition trail with sight set on €500m revenue by 2022
- Insurtech diary: Getting stuck into insurance
- Analysis: The mystery of the missing Insurance Fraud Taskforce report