Chelsea hit by £41m fraud
Chelsea Building Society has revealed it has lost £41 million to mortgage fraud, causing it to plummet into the red in the first half of the year.
The society says the fraud is the main reason it suffered losses of £26 million in the first half of the year. It blames third-party professionals, such as valuers and solicitors, for artificially inflating the value of property between 2006 and 2008. It is now trying to recover the money.
Borrowers falling behind with their repayments and falling property values added a further £12 million onto the society's impairment charges.
“We have seen rising levels of arrears on mortgages due primarily to the worsening UK unemployment situation - although there is indication from July 2009 data that the number of mortgage accounts in arrears is levelling off,” Chelsea said in a statement.
It stopped lending buy-to-let, sub-prime, self-certification and commercial loans at the end of last year and has since introduced stricter criteria requiring homeowners to have a 25% deposit.
The mutual lent £242 million in the six months to 30 June with retail savings balances up by £498 million to £10.06 billion after its efforts to building up its deposits arm.
All change at the top
Chelsea reported the biggest ever loss for a building society of £39 million last year, mainly due to £55 million of exposure to Icelandic banks. This led to the resignation of chief executive Richard Hornbrook earlier this month after 28 years with the mutual.
Now the UK's fourth largest building society has announced that finance director Andrew Parsons, who has been with the group for less than a year, will also leave after serving out his notice period.
Former chairman Trevor Harrison and deputy chairman Jean Wood quit the building society earlier in the summer. Stuart Bernau, formerly of Nationwide, has been drafted in as chairman and chief executive until a new boss is found.
He 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.”
However, Chelsea warned that conditions will remain tough in the coming months with credit risk in its mortgage book and liquidity proving the most pressing issue.
It says: “There is no sign that the current money market conditions will ease in the short term. Interest margins are expected to stay under pressure as the market for retail savings continues to be competitive. Chelsea will continue to focus on prime mortgage lending, improving its capital strength, reducing costs and increasing efficiency."
It also fuelled rumours that it could be open to a merger or buyout saying it would "continue to review the strategic options available to the society".
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.