Bradford & Bingley’s trials and tribulations

Speaking of Bradford & Bingley (B&B),
I got into trouble this week.  You see, they're a bank that's heavily
exposed to the mortgage market in Britain and, as mentioned in my last post,
they have a £40 billion mortgage book with most of it in buy-to-let (landlords)
and self-certification markets.

But they also have this book of business with
GMAC-RFC which I called 'toxic'.  GMAC didn't like the fact that I implied they'd sold B&B a pup, so why did I call it 'toxic'?

Here's the original announcement of this
agreement from December 2006:

2006-12-07
07:04:56
RNS Number:4102N
Bradford & Bingley PLC
07 December 2006

Agreement to acquire mortgage portfolios

Bradford & Bingley plc is pleased to announce that it has today signed a
further agreement with GMAC-RFC that allows the Group to acquire up to £4
billion of mortgage portfolios in each of the next three years. This agreement
follows the purchase of a number of similar loan portfolios from GMAC-RFC
totalling £6.5 billion since September 2002.

The acquisition will be made in four tranches per annum, the size of which will
be determined by Bradford & Bingley. The minimum consideration for each
tranche will be £350 million up to a combined maximum total of £4 billion per
annum.

The assets will be funded from the Group's existing resources.

All lending in the portfolios will be secured on residential property. In
addition to reviewing the credit controls GMAC-RFC employed in originating the
loan portfolios, Bradford & Bingley will further test the loan books using
its own credit scoring process to confirm that they meet the Group's credit
standards.

Bradford & Bingley is delighted to cement the long term future of this
excellent business relationship.

As can be seen, B&B have taken £6.5 billion worth of GMAC’s mortgages, and this
agreement added another £350 million of mortgage business from GMAC, as a
minimum, for each quarter from Q1 2007 through Q4 2009. 

So far, that amounts to £8.95 billion of GMAC’s
mortgage book in the UK. £2.45 billion since January 2007 and a further £1.75
billion to come.

£6.5 billion of mortgages and a further £4
billion to come may have seemed a good deal in December 2006, when liquidity
was freely available. 

Today, it's killing them.

First, the mortgage book is heavily in
default.  For example, B&B's general arrears for mortgages in 2008
have risen by 1% during the first half of the year, to 3.1%.  That's quite
high ... but the GMAC mortgage book is up from 2.1% in arrears to 5.72% on
average according to various news reports.

That's not good.

It is particularly not good when B&B are
having to pay more each year for credit default swaps (CDS) to protect
themselves.  For example, just since last week, the cost of CDS insurance has risen from
£425,000 per £10 million to £558,000.

In other words, the £8.95 billion GMAC mortgage
book is costing them £499.41 million in CDS cover, up £119.035 million per year
in the last week ... just for the GMAC book of business.

And there's a further £1.75 billion to
come. 

Whoopee-doo. No wonder this bank needs bailing out and is likely to be nationalised,
just like Northern Rock, in the next week.

Admittedly, B&B have tried to get out of
this noose around their neck, and managed to renegotiate this deal with GMAC so
that they get rid of their obligations sooner rather than later … but GMAC were
a little irate with me for saying their mortgage book was bad business for
B&B.

They sent me this statement:

"For clarity, GMAC-RFC is one of a
number of Bradford & Bingley’s acquisition partners.  GMAC-RFC is not
responsible for Bradford & Bingley’s business performance.  Indeed
they are working closely with Bradford & Bingley to improve the small
element of the books acquired that are not performing as expected.

"As I’m sure you understand, they are
not at liberty to discuss details of their contracts with third parties, but
GMAC-RFC is confident in the quality of the origination practices and processes
used to build portfolios for their trading partners.

"Also with regards to this week’s
agreement with B&B they’ve released the following statement:  '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. This fits with our strategy going forward in
the UK market.'”

As well as the statement below:

"23 September 2008

Bradford & Bingley and GMAC-RFC announce
new terms for mortgage agreement

"Bradford & Bingley (the Company)
and GMAC-RFC confirm today that they have successfully renegotiated the terms
of their mortgage forward sale agreement.

"Under the original terms of the
agreement, signed in December 2006, the Company agreed to purchase a minimum of
£350m of UK mortgage assets per quarter, with £1.75bn remaining to be purchased
before the end of 2009.

"Both businesses have agreed to revise the terms of this agreement to
their mutual benefit whereby £500m of loans will be acquired in Q4 2008 and
between £225m and £250m in Q1 2009 after which the agreement will cease.
GMAC-RFC will receive in lieu, the equivalent of the premium that would have
been paid should the agreement have run the full term."

That clears all that up then.

Meanwhile, I wrote an in-depth analysis of
B&B's situation a couple of months ago for Mortgage Finance Gazette, and
would be happy to share with
anyone who's interested.