Britain’s mortgage lenders may be sitting on hundreds of millions of pounds of worthless loans fraudulently obtained by criminals to support drug manufacturing, illegal immigration and money-laundering.

Bradford & Bingley, the buy-to-let mortgage lender, admitted yesterday that it had been forced to take an £18 million impairment charge in the half year to June 30 to cover borrowing by criminal gangs and other fraudsters. The sum represents an increase on a £15 million charge taken in June.

B&B’s losses may be only the tip of the iceberg. The Association of Chief Police Officers has estimated the scale of mortgage fraud in the UK at £700 million a year, but many believe this to be conservative. Navigant, a consultancy that conducts forensic investigations, has estimated that British mortgage lenders could be sitting on at least £7 billion of fraudulent loans.

B&B, which has 3 per cent of the mortgage market, is the first high street bank to disclose the size of its losses due to fraud. Rod Kent, its chairman, said that the bank had not been singled out and was no more vulnerable than other lenders. “We don’t think we are being selected, we are just being more transparent,” he said.

Mr Kent said that the matter was in the hands of police and that the bank was hopeful of recovering at least some of the cash. “It is important to stress that the £18 million bears no relation to the amount we expect to recoup,” he added.

Banks, insurers, regulators and trade bodies have become increasingly concerned in recent months as the falling housing market has begun to expose the scale of mortgage fraud. The Financial Services Authority has been particularly active, banning at least 20 brokers and fining two £100,000.

Philip Robinson, the FSA’s director of financial crime and intelligence, said: “The effect of the mortgage crunch has been to make it less easy for people to get away with these things. The forest [of credit] isn’t so big, so the trees stand out.”

On Monday, the Council of Mortgage Lenders, the trade body, will introduce measures to stop unscrupulous developers and surveyors inflating property valuations on new homes. Developers will have to disclose to lenders and valuers any incentives offered to prospective buyers.

That move is expected to be followed in October by the publication of new mortgage guidelines by the new National Fraud Strategic Authority.

Lawyers and accountants involved in investigating fraudulent mortgages said that criminal gangs had taken advantage of cheap credit and lax lending during the housing boom. Often, the gangs were aided in buying properties by rings of colluding mortgage brokers, surveyors and solicitors.

The gangs then sold the properties for a quick profit before disappearing without making a mortgage payment. Alternatively, they used the properties for making drugs or sheltering illegal immigrants, with the fraudulent nature of the loan emerging later. Typically, they bought new flats in cities such as Leeds, raising prices for honest buyers.

Lawyers said that mortgage fraud could be difficult to prosecute, because many fraudulent borrowers abscond before the fraud is discovered. Lenders and insurers are therefore likely to pursue legal action against solicitors and brokers who were either complicit or failed to conduct sufficient checks.

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