€4 billion Mortgage loans risk

BILLIONS OF euros worth of mortgage loans are at risk because of ‘irregularities’ Bank of Ireland officials have discovered in mortgages they have sold.

They have become so concerned about the still unspecified irregularities that they have called in the Garda Fraud Squad.

And, the Irish Mail on Sunday can reveal, the probe has been extended from BoI loans to those provided by most of the country’s major lenders.

More than 120 ‘suspect’ mortgage deals worth an estimated e30m have been identified so far, and all are due to come before the courts.

In documents due to be published later this year in the Official Irish Law Reports, a High Court judge warns there is ‘serious risk’ to the entire mortgage system in Ireland.

The astonishing remarks were made by Judge Mary Laffoy in a High Court case last November – but came to light only last night.

The issue Judge Laffoy adjudicated on involves a Bank of Ireland Mortgage Bank customer who defaulted on a e250,000 mortgage for a property in Cork.

As a result, officials began examining the files on the agreement and discovered that despite issuing the mortgage cheque, they didn’t – and still don’t have – any legal charge over the property.

The case highlights the fact that of the estimated e28.8bn in mortgages issued in 2006 alone, mortgage lenders do not actually have the necessary paperwork to back any legal claim on mortgages worth an estimated €4bn.

This is partly to do with ongoing delays at the Land Registry. The delays become an issue only if banks need to call in their loans.

During her summing up, Judge Laffoy drew particular attention to the significance of the undertakings made in lieu of documentation.

She said: ‘I am very conscious of the serious risk to the integrity of the lending system in relation to residential mortgages which this case has exposed.

‘The evidence is that the Bank of Ireland Mortgage Bank has advanced in excess of e2.2bn on residential mortgage loans, such as the loan to the borrower in this case, in the financial year to August 2006.

‘In practically all of those cases, the loan cheques were issued to the borrowers through their solicitors on foot of, and in total reliance on, undertakings in the Law Society approved format.

She heard that BoI discovered ‘irregularities in the mortgage transaction at issue and other mortgage transactions, the applications for which had all been introduced to the bank by the same mortgage broker’.

The court was told that this individual was a member of a panel of brokers and valuers approved by the Bank of Ireland itself.

The bank had sued a prominent solicitor who had given it an undertaking so that the mortgage cash could be released. The property in question was purchased in 2001 for e90,000, valued at e295,000 in 2003, and a mortgage issued in September of that year.

However, the first instalment was not paid for three months and by the following March, bank officials had identified the ‘irregularities’. After a further 17 missed instalments, the bank called in its loan in December 2004.

It was only after the property was valued two years later by an independent firm of valuers that the bank discovered that the actual valuation on the property they granted a e250,000 mortgage on was e140,000.

The bank’s claim against the solicitor failed but is under appeal. At no stage in the case do any of the parties involved appear to have played any role in any fraudulent activities whatsoever.

Compliance consultant Peter Oakes said the case could have a knock-on effect on the property market: ‘It’s overvalued enough, prices are already falling and the last thing the banks need is a big fat question mark over the value of their investments.’