Nearly 70 mortgage brokers face legal action after being suspected of mortgage fraud by the Financial Services Authority (FSA).

The City watchdog said that it has referred one third of 200 brokers under investigation to its enforcement division, after tip-offs from mortgage lenders about suspected fraudulent mortgage applications.

The FSA's head of fraud said the problem was "bigger and more widespread" than previously thought and was particularly rife among new-build property development schemes, potentially costing the mortgage industry millions of pounds.

It is understood that around half of the cases that will face further examination involve "organised rings" of professional mortgage fraudsters, which include solicitors and surveyors.

The rest are cases where brokers have "fiddled figures" to secure bigger loans for their customers.

In a speech to the mortgage industry yesterday, Philip Robinson, financial crime & intelligence director at the FSA, said: "The greater threat is of organised rings, using mortgage and property fraud to make significant profits.

"They can include brokers, solicitors, valuers and other professionals in the property market. And the police tell us that these frauds are also carried out by criminals who are involved in other criminal activities – such as drugs or people smuggling".

The warnings came after the Council of Mortgage Lenders (CML) raised concerns that some new-build property developers are over-inflating the price of properties aimed at first-time buyers, but offering discounts and other incentives.

Once the excessive funds are secured from the lender, the developer pockets the difference, leaving the bank exposed to large losses if the borrower struggles to repay the loan and the property is repossessed.

The FSA estimates that the potential loss due to repossessions connected with new-build mortgage fraud are around £45,000 per property.

The CML said repossessions rose to an eight-year high of 27,100 last year, from 22,400 in 2006 and has predicted 45,000 repossessions this year.

The CML said: "In recent years, discounts and incentives have had the effect of making the real value of new homes less than transparent.

"This is bad news for genuine buyers and for lenders. Buyers may find themselves with a mortgage worth more than the property's value, while lenders may find themselves exposed to fraud and the risk of loss."

The FSA said it expected that mortgage fraud to drop-off naturally, as a result of the credit crunch and a slowing housing market.