Today’s announcement that Bradford & Bingley, Britain’s biggest buy-to-let mortgage lender had already suffered huge losses in the first few months of the year caught many by surprise.
However, it is the lender's bad debt figures, located towards the back of its 11-page announcement, which was a point of concern.
Reports indicate that the buy-to-let mortgage lender is being crippled by the more than £400m worth of loans which it bought within the past 18 months along with just over £600m of potentially failing loans it made itself.
However, Bernard Clarke of the Council of Mortgage Lenders [CML] said, “It's hardly surprising to see a higher default rate with lending to riskier customers,”
With the current slump in house prices and growing unemployment lenders and brokers can no longer hide the fact that borrowers who are not credit worthy ended up with the loans that is now costing the lending market.
According to their records, 4.47% of the mortgages that were bought up are now in arrears. Their value is even greater, at just over 5% of the total sum lent by GMAC and Kensington.
However, in what seems to be a total contrast to popular belief, the buy-to-let loans on the B&B’s books is 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.
In addition to that, another 1,006 mortgages lumped into the B&B's "other" category, presumably comprising even riskier loans, are 5.69% in arrears.
By the end of April, 2.16% of all of the B&B's mortgage customers were either in arrears by three months or more, or had been repossessed.
That was up sharply from the position at the end of last December when only 1.63% of mortgage customers were in that position. The figure was significantly worse than the industry average, which stood at just 1.1% in the second half of last year.
In 2006 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.
Reports further show that 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 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.
Initially, during 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.”
However, their level of scrutiny for loan applications appears questionable after the B&B revealed that arrears among the acquired loans, especially those from GMAC, have turned out to be far worse than expected.
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.
This year has seen many mortgage lenders hit hard by the credit crunch because the continued slowdown in the economy, and higher household bills, has affected quickly the ability of home owners to repay their mortgages.
