When Zhu Chenxia bought a flat last year in Shenzhen from Lei Yarong, the two women drew up three purchase agreements to cover the deal. Only one was genuine. In the legitimate contract, Zhu agreed to pay Lei 6.49 million yuan (about $980,000) for the 96-square-meter apartment. Zhu cooked up a second that overstated the value of the flat at 7 million yuan. This one was for the bank. If Zhu had presented her lender with the true purchase price, she would only have been entitled to borrow up to 70% of that amount, or 4.54 million yuan. The higher valuation convinced the Bank of China to lend Zhu 4.85 million yuan, leaving the lender less buffer against a price drop.
Mortgage fraud is rampant in China’s roaring property market. A Reuters examination shows that across China, unqualified borrowers use fake documents to secure mortgages, while loans deceptively obtained for other purposes are funneled into property. These frauds are often committed with the consent and encouragement of other parties to the transactions, including lending brokers, property agents, valuation companies and the banks themselves.