The Harsh Realities of Mortgage Fraud: How does an innocent land owner get around a fraudulent mortgage?
In the Australian financial landscape, incidences of identification fraud are dramatically increasing in both frequency and sophistication. Rapid leaps in technology have now made it possible for even moderately well-resourced individuals to create authentic copies of identification documents for the purpose of defrauding innocent persons. The consequence of this is that identity based fraud continues to cause considerable financial losses for both industry and private individuals.
Mortgages are one of the most common and distressing vehicles through which fraud can be perpetrated. When a fraudulent mortgage is secured over the property of an innocent landowner, it allows the individual perpetrating that fraud to access significant funds. Conversely, for the innocent landowner, this act represents a sickening attack on what is often one of their most valuable assets.
In Queensland, mortgagees are required to take reasonable steps to verify the identity of mortgagors and Verification of Identity (VOI) requirements are in place to ensure that mortgagees take proper steps to ensure that the person purporting to grant a mortgage is the same person who is, or who will become, the owner of the land that the mortgage is to be secured against.
If a fraudulent mortgage comes into existence and it is proven that the entity or person facilitating the mortgage failed to comply with the VOI requirements, then an innocent landowner may be able to have the fraudulent mortgage set aside on that basis by applying to the Supreme Court for an appropriate order. However, as prefaced, advances in technology mean that not even strict compliance with the VOI requirements can necessarily prevent a fraudulent mortgage from coming into existence. In fact, by following the VOI requirements a mortgagee is provided with a “safe harbour” from allegations it did not take reasonable steps to verify the mortgagor’s identity at the time the mortgage was granted.
If a fraudulent mortgage does come into existence after the VOI requirements have been met and is subsequently registered over the property of an innocent landowner, the situation suddenly becomes far more problematic.
Assuming the mortgagee is not party to the fraud (and was not on notice of the fraud), the mortgagee will become entitled to an indefeasible interest as a registered mortgagee over the property in question. Where the mortgage contains payment obligations, the mortgagee will also most likely be able to enforce these against the land (but not necessarily against the personal assets of the defrauded mortgagor). Where the money secured by the mortgage is actually payable under another document that was also fraudulently signed (such as a separate loan agreement), then there may be an ability of the mortgagor to argue that the mortgage, in fact, secures nothing and should be released.
There is much case law on mortgage fraud which illustrates that the outcome of a particular instance of mortgage fraud depends very much on the facts of the case. It is a complex area, and an area where there is an apparent conflict between the certainty expected by both landowners and mortgagees under the Torrens system (where indefeasibility of title by registration is the expectation) and the more basic expectation of fairness where someone has been defrauded of their property through no fault of their own. The mechanism through which these conflicting expectations are resolved is that a defrauded landowner may apply to the State to be compensated for the loss caused due to the fraud. That in itself is not a straight forward process.
It does shock one’s sense of fairness that the system of title registration operates to enforce a fraudulently registered interest, and this is a point that continues to be the subject of much critique.