B&B strikes deal over mortgages

The deal may lift some of the cloud over the B&B

The Bradford & Bingley bank has managed to draw a line under a potentially damaging obligation to buy £1.75bn worth of mortgages.

Its deal, with the lender GMAC-RFC, will now see it buy up to just £750m worth of the loans, but not the rest.

The borrowers that the B&B has been taking on, under this and other similar arrangements, have been defaulting at an alarming rate this year.

B&B first agreed to buy some of GMAC's mortgage book in December 2006.

The B&B said both sides had agreed to the new deal "to their mutual benefit".

"We think it is a positive development and will be welcomed by shareholders," said a B&B spokesman.

Takeover target?

In the wake of last week's emergency rescue takeover of the UK's biggest mortgage lender, HBOS, by Lloyds TSB, there had been speculation that the B&B might also have to be rescued by a larger lender.

We are working closely with Bradford & Bingley to improve the small element of the books acquired that are not performing as expected GMAC-RFC

It was suggested that the Financial Services Authority (FSA) had been trying to line up a potential bidder, but without much progress.

Last week the B&B's worthiness was downgraded by the credit ratings agency Moody's.

And on Tuesday Standard and Poor's and Fitch Ratings downgraded ratings on B&B, citing concerns about the quality of its loan book and its ability to raise funds.

Its share price slumped at one stage last week to just 25 pence, having stood at 184 pence four months ago.

GMAC was until this year one of the UK's biggest mortgage lenders, specialising in lending via mortgage brokers only, but has effectively shut up shop to new business because of the credit crunch.

"We are pleased to have reached this agreement which provides GMAC-RFC with certainty in this market, both by providing a secure exit of the loans it has originated and in terms of the equivalent premium that would have been paid should the agreement have run the full term," said GMAC.

"We are working closely with Bradford & Bingley to improve the small element of the books acquired that are not performing as expected," it added.

Big deal

The deal struck in December 2006 originally committed the B&B to buying up to £12bn worth of mortgages over the course of the following three years, a commitment that has been fulfilled save for the remaining £1.75bn.

Under the terms of the revised deal the B&B will still buy £500m more of the home loans, within the next three months.

And it will then buy between £225m and £250m more in the first quarter of 2009.

But it will not have to buy the last £1bn worth of the mortgages.

It is thought that the cost to the B&B of striking this arrangement will be about £12m.

It will pay this to GMAC-RFC in lieu of the profit that the lender would have made on selling the remaining tranche of loans to the B&B.

These mortgages will now have to kept on its own books or be sold to someone else.

The B&B share price closed down 3.5 pence, or 12%, at 24.75 pence on Tuesday.

The deal with GMAC-RFC was announced after trading had closed.