Buy-to-let fraud pushes Chelsea building society into the red

Published 22nd Aug 2009

The loss-making fraud, connected to lending between 2006 and 2008, was caused by 'artificial inflation of property values by third-party professionals'

Fears of widespread fraud on the mortgage books of Britain's high-street lenders emerged after Chelsea building society today admitted that it had uncovered fraud of up to £41m.

Mortgage professionals such as brokers, valuers and solicitors are suspected of colluding in the fraud by inflating prices on buy-to-let flats in northern cities, raising concern that other lenders could suffer similar losses.

The properties involved are sold and resold among a group of landlords, with the price inflated each time by a fraudulent valuation.

Chelsea, Britain's fifth-largest building society, with more than 600,000 savers, said that a review of its mortgage book by external consultants had identified several potentially fraudulent loans, mainly affecting buy-to-let mortgages taken out between 2006 and 2008, at the height of the property boom. A team of 12 to 15 specialists is now going through these cases to see if fraud has been committed.

Jeremy Hicks, a spokesman for Chelsea, said: "It's largely mortgage brokers, solicitors and valuers working in collusion to overinflate property values." He said it was unlikely that Chelsea was the only building society being targeted.

The nationalised bank Bradford & Bingley set aside £271m in the first half to cover potential losses from fraud.

Jonathan Richards, partner at the law firm Eversheds, said the announcements indicated: "There is a significant fraud and professional negligence problem in most lenders' loan books.

"What is different about the current wave is that the full extent of the problem is probably not known by many lenders, as in many instances the accounts are still performing and interest rates are low.

"In many cases the properties are unlawfully tenanted and the rent is being used to service the borrowing. The likelihood is, however, that these accounts will default at some stage in the future, particularly if interest rates rise."

Stuart Bernau, Chelsea's chairman and interim chief executive, who joined the building society from Nationwide last month, said that a large proportion of the dubious deals were uncovered in newly built apartment blocks in Manchester, Leeds, Birmingham and Liverpool.

"If you get collusion between an intermediary, a local valuer and perhaps a solicitor, they can start to inflate property prices," he told Bloomberg. "When you come to sell the property, it's worth nothing like what you thought."

Chelsea stopped writing new buy-to-let, self-certification and sub-prime business at the end of last year and now focuses on low-risk customers.

Adrian Coles, director general of the Building Societies Association (BSA), said: "Every time there is a big fraud disclosed, it rings alarm bells." However, he added: "The BSA has no evidence at all that any other building society is exposed to anything like the size of the fraud at Chelsea building society."

A spokeswoman for the Council of Mortgage Lenders (CML) said it was fully aware of the issue and had taken steps to reduce risk for lenders. It was especially concerned that "cashback" mortgages were artificially inflating the value of properties.

In 2008, the CML introduced rules under which any cashback or other extras thrown in must be disclosed when a newly built property is sold. It has also put in place schemes with the Financial Services Authority, the City watchdog, to encourage lenders to report any fraudulent activity by mortgage brokers. The FSA has banned 60 mortgage brokers in the past two years.

Hicks said that while Chelsea had decided to make a provision of £41m to cover potential losses from mortgage fraud, it was "very confident that it will be a lot less". He added that the figure was small when set against the £1bn the mutual had lent in 2007-08.

"We certainly have enough funds to cover this sort of hiccup. We wouldn't want our customers thinking that we're in trouble," Hicks said.

The charge pushed the building society, which dates back to 1875, to a first-half loss of £26m, compared with a profit of £23m last year. The provision increased Chelsea's total impairment charge to £53m from £4m last year as it also wrote down other loans.

Source: ' Guardian '

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