B&B sounds alarm bells for UK's buy-to-let lenders
LONDON, June 3 (Reuters) - A sudden rise in bad debts at Bradford & Bingley Plc (B&B) has set alarm bells ringing in Britain's buy-to-let mortgage sector, even if most of the lender's troubles lie with poor loans it is buying from others.
Monday's trading update from B&B BB.L, Britain's largest lender to landlords, was the bleakest to date from a UK bank, particularly its warning of accelerating arrears, an indicator of customers who may be at risk of default.
B&B is more exposed to buy-to-let than big rivals, with the sector accounting for almost 60 percent of its loans.
Most of the problems, however, came not from its own book but from loans it agreed to buy from finance company GMAC-RFC under a deal renewed in December 2006.
B&B's customer arrears rose to 2.2 percent at the end of April from 1.6 percent at the end of December, while the proportion of loans three months or more in arrears among its acquired loans jumped to more than double that at 4.5 percent from 3 percent.
And B&B, which had said GMAC loans met its standards, must still take on more of those mortgages, even as it struggles to tighten criteria, reducing its ability to write more profitable new business and pushing impairment costs still higher.
Under the current deal it must buy at least 350 million pounds of loans per quarter, or a minimum of 2.1 billion pounds to the end of 2009. It also has a deal with Kensington Group to buy up to 2 billion pounds of home loans over two years.
"It is difficult to know why arrears levels have picked up so quickly. It suggests their early warning system isn't functioning," analyst Mike Trippitt at Oriel Securities said.
Others agree.
"Clearly, the deterioration we've seen in Bradford & Bingley's home-grown and acquired books is alarming. It's the pace which sets alarm bells ringing," analyst James Hutson at Keefe, Bruyette & Woods said.
PARTY OVER?
Within acquired mortgages, self-certified loans, which are targeted at self-employed workers, suffered the biggest jump, along with the "other" category, which includes standard but also near-prime lending. But in buy-to-let alone arrears went from 2.1 percent to 3.5 percent.
Buy-to-let surged in the past decade during which UK house prices tripled and makes up 10 percent of all mortgages.
But it has come under pressure in recent months as the housing market slows rapidly and specialist banks are hit by the credit crunch.
Lenders and industry observers have long argued the sector should prove resilient in the face of a wider downturn, with demographic trends fuelling higher rents, helping landlords to pass on higher borrowing costs. Defaults have so far been low.
Monday's news from B&B, however, suggests other factors including falling house prices and a drop in employment levels, could prove damaging.
"The spin is buy-to-let is (resilient), but that's not the message I take away. I take away the message that it hasn't gone wrong yet," analyst Bruce Packard at Pali International said.
A decline in the buy-to-let market would be particularly damaging for B&B with its 20 percent market share, but would also prove tough for number-two player HBOS HBOS.L, for which buy-to-let accounts for more than a quarter of lending.
Others could also be hit including Bank of Ireland (BKIR.I), which owns Bristol & West, and Lloyds (LLOY.L) which owns Cheltenham & Gloucester, the number five lender.
But many suggest buy-to-let will still survive the crunch.
"After all, people have to live somewhere and if they can't get a loan to buy they are going to be forced to rent," Howard Wheeldon, a senior strategist at BGC Partners, said. (Editing by David Holmes)
