Chastened Chelsea changes tack after massive fraud loss

Chelsea Building Society is going back to basics after losing £41m on buy-to-let mortgages.

Last Updated: 31 Aug 2010

Chelsea, Britain’s fifth-biggest building society, admitted today that it slumped to a £26m loss in the first half of 2009, thanks largely to a £41m hit from mortgage fraud. Apparently it signed off on a number of buy-to-let mortgages between 2006 and 2008 where the value of the property had been artificially inflated, mostly by ‘third-party professionals’ (i.e. mortgage brokers and the like) and these loans are now worth a lot less than they previously thought. It’s a disastrous episode for the 134-year-old institution, and it’s already forced out its two top managers – but at least it’s persuaded Chelsea to start acting like a proper building society again…

Like so many of its rivals, Chelsea made a rather aggressive bid for market share in mortgages between 2006 and 2008, particularly in the London area – where the property market has of course fallen harder than most. It borrowed on the money markets to fund its lending, and clearly didn’t pay close enough attention to the BTL deals it was agreeing – which allowed some unscrupulous brokers to take it for a ride. Now it’s facing up to the consequences of poor risk management and a falling property market: it’s had to write off £41m for the fraud, and another £12m on bad debts. Together these resulted in a half-year loss of £26m, down from a £23m profit this time last year.

With results like these, it’s perhaps not surprising that chief executive Richard Hornbrook quit earlier this month, while FD Andrew Parson also resigned today after less than a year in the job (to take a role at Friends Provident). However, Chelsea has been busy getting its house in order: at the end of last year it quit buy-to-let lending altogether, and it will now only lend to borrowers with a 25% deposit. It’s also promised to fund all its lending from retail savings deposits – like banks used to do in the good old days. ‘We are concentrating on the society’s strengths by returning to its traditional values,’ said chairman Stuart Bernau today (who’s also acting as interim CEO until a replacement can be found). So it’s clearly been a chastening experience all round.

Happily for Chelsea, its focus on retail savers is going well: it signed up 38,000 new accounts in the first half, taking its total balances to over £10bn and allowing it to cover all its mortgage assets. However, there is of course a flipside to all this sensible retrenchment: its new lending fell by almost half, to £242m. That’s probably good news for Chelsea, and it’s an entirely rational move. But it’s also keeping money out of circulation – and since various other banks and building societies are doing the same, this won’t do our economic recovery prospects much good.

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