B&B sounds alarm bells for UK's buy-to-let lenders

By Clara Ferreira-Marques

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.