Page last updated at 13:04 GMT, Monday, 2 June 2008 14:04 UK

Bad debts at the Bradford & Bingley

Analysis
By Ian Pollock
Personal finance reporter, BBC News

Bradford & Bingley branch
Bad debts are bad news for the Bradford and Bingley

The problems at the Bradford & Bingley seem alarming.

In the first few months of the year it has actually lost money, which is very unusual for a mortgage bank.

And it is having to shore up its finances to the tune of 400m.

But it is the lender's bad debt figures, located towards the back of its 11-page announcement, which are just as worrying.

The slowdown in the economy, and higher household bills, have affected quickly the ability of home owners to repay their mortgages.

By the end of April, 8,333 of the B&B's borrowers - 2.16% of all the bank's mortgage customers - were in trouble, with arrears of three months or more, or in the throes of being repossessed.

That was 35% more than at the end of last December when only 1.63% of borrowers - 6,170 - were in that position.

And that was already far worse than the industry average, which stood at just 1.1% in the second half of last year.

Buying mortgages

Back at the end of 2006 everything seemed rosy in the mortgage lending business, so the B&B decided to expand its lending by the simple method of buying existing stocks of loans from other lenders.

In December 2006 it agreed to buy up to 12bn worth of mortgages, spread over the next three years, from GMAC, the finance arm of General Motors that specialised in buy-to-let mortgages, the B&B's own favourite type of loan.

A few months later it bought a further 2bn of loans from another lender, Kensington, to be spread over two years.

These too were buy-to-let mortgages, as well as "prime self-certificated" loans.

Those were the sort where borrowers did not have to provide much evidence of their earnings, or their ability to repay their loans, to get the mortgage in the first place.

Scrutiny

At the time of its deal with Kensington, the B&B said it would take the loans in monthly tranches, after scrutinising them to make sure they were "in line with strict credit parameters."

It's hardly surprising to see a higher default rate with lending to riskier customers
Bernard Clarke, CML

Whatever the level of scrutiny that was applied, it does not look quite good enough now.

The B&B has revealed that arrears among the acquired loans, especially those from GMAC, have turned out to be far worse than expected.

Of the mortgages that were bought up, 4.47% are now in arrears.

Their value is even greater, at just over 5% of the total sum lent by GMAC and Kensington.

Contrary to a growing popular myth, the buy-to-let loans on the B&B's books are in fact some of the most secure.

Among those bought by the bank, 3.52% are in arrears, along with just 1.3% of those lent by the B&B itself.

But of the self-certificated loans that have been bought, 4.3% are now three or more months behind with repayment.

And 1,006 mortgages lumped into the B&B's "other" category, presumably comprising even riskier loans, are 5.69% in arrears.

The B&B says it is now going to counteract this emerging problem by reducing the number of mortgages it will buy from GMAC to the legal minimum required by its deal.

Riskier customers

Altogether, the B&B now finds that more than 400m worth of loans which it bought within the past 18 months are turning sour, along with just over 600m of potentially dud loans it made itself.

"It's hardly surprising to see a higher default rate with lending to riskier customers," said Bernard Clarke of the Council of Mortgage Lenders (CML).

But you can see why all of a sudden the bank would like to raise an additional 400m to bolster its finances.

And once again it poses the question of whether some lenders have simply been mad to lend money to people who "certified" themselves as credit-worthy.

Nearly five years ago the BBC's Money Programme highlighted the problem of some dishonest mortgage brokers who were encouraging people to lie on application forms to get round the problem of not really being able to afford a mortgage.

With house prices and employment buoyant that problem was largely disguised.

But with the B&B admitting it has recently lost 15m through mortgage fraud, it seems that is no longer the case.



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