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".