Building society hit by £41m mortgage fraud

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The Independent Online

Chelsea Building Society said today it was the victim of mortgage fraud after revealing a £41 million hit on buy-to-let and self-certification loans.

It blamed "third party professionals" for unscrupulous behaviour in artificially inflating buy-to-let property values, while it found cases where self-certified borrowers had lied about their salary.

Chelsea - the UK's fifth largest society - said it was in collaboration with other lenders to take suspected fraudsters to task as the industry counts the cost of high risk and aggressive lending during the mortgage market boom.

Nationalised Bradford & Bingley revealed last week it was setting aside £270.8 million in the first six months of the year to cover potential losses from fraud and professional negligence.

The group, which is being wound down after its state rescue last year, flagged up rising fraud last year, but last week's figures confirmed the scale of the problem as its provisions rose by nearly £100 million since 2008.

City watchdog the Financial Services Authority has described mortgage fraud as "serious and widespread" in the UK and pledged last year to raid hundreds of brokers to flush out bad practice.

Chelsea's fraud provisions left the group nursing £26 million in losses for the first half of the year, compared with pre-tax profits of £23 million a year earlier.

It said where possible it was trying to recover money involved in the mortgage fraud, which occurred between 2006 and 2008 at the height of the property price bubble.

But the firm said its risk controls may not have been as tight as they could have been at a time of booming demand for mortgage finance and runaway house prices.

Both buy-to-let and self-certification mortgages are considered higher risk, with the latter in particular more problematic, as it is allows borrowers to "self-declare" their salary.

Chelsea stopped writing new buy-to-let, self-cert and sub-prime business at the end of last year and has since conducted a review of its risk management, setting up a number of risk committees.

It also led a complete boardroom overhaul and announced today that finance director Andrew Parsons is the latest to head for the exit, following chairman Trevor Harrison and chief executive Richard Hornbook, who leaves at the end of this month.

Chairman and temporary chief executive Stuart Bernau, who joined on August 1 from Nationwide, said: "The society has been through a difficult period and reporting a loss in the first half of the year is disappointing.

"However, the underlying performance is strong, even though we have had to make provision for impairment and fraud losses."

Troubled Chelsea is reportedly considering a merger or share issue after suffering from the credit crunch and housing market slump.

A spokesman today confirmed it was "not ruling anything out" under the root and branch review of strategy being led by Mr Bernau.

Chelsea is thought to be one of a number considering drastic action to recover from the financial crisis. Its credit ratings were downgraded by both Moody's and Fitch earlier this year.

The society's total impairment charges rose to £53 million, including the fraud impact, which compares with £4 million a year earlier.

Its half-year losses follow a £39 million dive into the red in 2008 when it revealed the impact of exposure to the failure of Icelandic banks.

However, Chelsea today said its hit from the Icelandic banking woes was not as bad as first feared, now estimated at £20 million against £55 million at the year-end.