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Author: Clitheroekid Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 311517  
Subject: Re: Panorama Date: 06/02/2008 00:42
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I feel I'm owed a consultant's fee from Panorama - http://boards.fool.co.uk/Message.asp?mid=10688050&sort=whole

However, whilst I also greatly enjoyed Manks's post I feel he was far too easy on the `poor woman' solicitor that they wanted to interview.

From my perspective I have seen practices like this ever since I qualified, and there is a deeply depressing sense of déja vu.

The first time I recall this happening was in the mid-80's. In those days it was common practice for sellers to provide `repair allowances' to people buying houses. Thus, if a seller of a house priced at £50,000 was willing to accept £47,500 from a first time buyer who could get a 95% mortgage but had no deposit a `repair allowance’ of £2,500 would be written into the contract to be paid on completion. Theoretically, this was to cover the cost of essential repairs, but in practice it meant the buyer only paid £47,500 and got a 100% mortgage.

The practice died out when lenders started offering 100% mortgages.

The next time it cropped up was when people started buying flats from developers with the intention of letting them rather than living there. In those days there was no such thing as buy to let, and people who wanted to do this had to pretend they were buying the flats for their own occupation, thereby getting 90% or 95% mortgages.

This time it was the developers who conspired with the buyers by giving various discounts off the headline price. I recall in the mid-80's refusing to act for a client who was getting something like a 35% discount off a new build because he wouldn't allow me to disclose this to the mortgage lender.

The client thought I was bonkers – and ended up in prison, convicted of mortgage fraud.

But this was an extreme example. In those far off days there was no CML Handbook, money laundering was when a fiver in your jeans went through the washer and most solicitors thought the sort of practices mentioned were no problem, within reason.

The worst aspect of it was that exactly as today the lenders, the valuers, the mortgage brokers, the estate agents and everyone else who had a snout in the trough all knew exactly what was going on.

And nobody gave a damn - as long as prices kept increasing.

But then, quel horreur! Prices stalled - and fell - and as borrowers realised they were paying money to buy a depreciating asset they stopped paying.

And repossessions soared, and lo! The mortgage lenders expressed shock and horror that they had been so grievously misled. They wreaked their revenge in the criminal courts by locking up a few of what would nowadays be called entrepreneurs and a few professionals (pour encourager les autres). They then turned to the civil courts by suing valuers and solicitors for not having advised them that they were stupid, greedy, irresponsible dolts who weren't fit to run a whelk stall.

So by the early 90's those who were left were a chastened bunch and generally behaved themselves. As the 90's progressed the Law Society continually gave us dire warnings of mortgage fraud on a regular basis, such as the Green Card, and then the CML Handbook came out in 1997 which again spelt out the symptoms in words of one syllable.

The net result was that by 2000 no solicitor involved in conveyancing could fail to spot mortgage fraud.

But then what happened? Why, the whole miserable saga started all over again. The difference was that this time round the lenders didn't have to turn a blind eye - au contraire, they were acting like crack addicts, throwing more and more money at increasingly speculative crap (by which term I refer to both the properties and the borrowers).

Who cares if the customer has no income - self-certify! And we'll bung the mortgage broker a few hundred quid so he can get some fake accounts or wage slips printed up. We know they're a con, but we must maintain market share, and if the application comes through the broker rather than the branch we can't be blamed when it all goes pear-shaped, can we?

The valuers were no longer locals who might have realised the prices were ridiculous - the lenders didn't trust small local firms, but wanted nationwide firms who were happy to do bulk valuations for £100 a time. Unfortunately, they knew nothing about the local market and for £100 they weren't going to leave their comfy office to find out.

But hey presto, with perfect timing the cavalry from the Land Registry came to their aid by helpfully publishing the prices of all the neighbouring properties.

And now the dread phrase `automated valuation model' began to be heard. What was the point of actually looking at a property when you could just read the price that the one next door had sold for? Suddenly, £100 a pop looked like good money!

So if the lenders had given up checking the quality of the borrower and the valuers had given up checking the quality of the property who was left?

You guessed it, the thin red line of the legal profession.

And surprising as it may seem most traditional firms of solicitors are fairly honest, if only for reasons of self-preservation. In many cases their clients are either established or referred by established clients and if they appear to have been suckered into a dodgy transaction they can and will usually be steered clear. At the end of the day the individual solicitor's local reputation is much more important than an extra conveyancing fee.

But as with the valuers, conveyancing is now becoming commoditised. There are any number of conveyancers on the net offering to do conveyancing at rock bottom prices. The people doing it aren't qualified and as they will never meet the client or, probably, act for them again what do they care if the purchase looks iffy? In any case, like the valuers, they've no idea what a flat in Nottingham's worth if they're based in Basingstoke or Swansea.

And then there are those firms who are worse than `couldn't care less' - the ones who have entirely lost sight of who they're acting for.

These are the `tame' firms who actively court builders and their agents for referrals - incredibly, the Law Society, so po-faced about most things, recently changed the rules to allow solicitors to bribe, sorry, `pay referral fees' to such `introducers’.

Where the builder is referring a high volume of work to a firm of solicitors there is a blindingly obvious danger that the solicitors will be far more concerned to keep the builder sweet than the client - and this includes not just their buyer client but the mortgage lender client as well.

And this is where we re-enter the old days of mortgage fraud. The `repair allowance' is now a `gifted deposit' or a `cashback' or any other number of euphemisms for a discount. The solicitor must report these to the lender. But if they do, and the lender pulls the deal, how will that affect relations with the builder who's sending you dozens of new clients a week? Well you won't be top of their Xmas card list, that's for sure. Overnight your practice will lose a massive chunk of income.

So the solicitors con themselves into thinking it won't matter, as the client will sell on in a year or so (another conveyancing fee, kerching!) make a nice profit, repay the mortgage and everybody's happy - what the eye doesn't see the heart doesn't grieve over.

Until the merry-go-round stops.

At the end of the day it all comes down to greed. The `greedmeisters’ are the lenders, and Northern Rock is a prime (sub-prime?) example. They were lending 125% mortgages to non-status borrowers on overvalued property and they deserve to get not just their fingers burnt but their entire miserable body incinerated.

But most of the others were just as bad. In the desperate race for that coveted market share and the elevated interest rates that dodgy borrowers were willing to pay the `respectable’ lenders set up subsidiaries who could lend their money at high rates but without damaging the brand. Thus Halifax do their sub-primes through Birmingham Midshires, the Skipton do theirs through Kensington Mortgages etc etc.

In fact, the only lenders to come out of this snoutfest with any dignity were – you guessed it, the small local building societies who lent to people they knew on property they knew.

So, Mr Clitheroekid, un peu long on criticism but short on solutions? I hold my hand up - I really don’t know how to prevent this happening again.

However, one thing I would do is prohibit conveyancers paying for work or accepting more than a small number of referrals from any developer. I would also change the Land Registry rules to provide that the net price paid for a property would have to be disclosed by the buyer and recorded on the register.

And perhaps I would pass a law making a common sense exam compulsory for any potential home buyer!
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