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Bradford & Bingley Counts £700m Cost As 5% Of Borrowers Default On Mortgages

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Bradford & Bingley counts £700m cost as 5% of borrowers default on mortgages

Borrowers with the state-owned Bradford & Bingley (B&B) are defaulting on one in 20 mortgages and the failure rate is set to go even higher.

Richard Pym, B&B's chairman, told The Times that the proportion of borrowers more than three months behind on their repayments had worsened since March, when B&B reported an arrears rate of 4.6 per cent, itself double the 2007 figure.

“It's now above 5 per cent,†Mr Pym said, “and it will continue to deteriorate for the remainder of the year.†He estimated that loan losses this year would be between £600 million and £700 million, compared with £500 million last year, as thousands more amateur buy-to-let landlords and self-certified borrowers get into difficulties.

B&B, which has borrowed more than £20 billion from the Government so far, is set to borrow billions more because its wholesale loans from the private sector are maturing much faster than its mortgages are being paid back, creating a widening working capital shortfall.

It expects to redeem only about £2 billion of mortgages a year over the next three years, while as much as £10 billion of its wholesale borrowing comes due this year alone. The Government has pledged to provide the necessary additional working capital, on top of £18 billion in direct loans and other loans channelled through the Financial Services Compensation Scheme (FSCS).

Buy-to-let borrowers are in no hurry to pay back mortgages because, under deals struck before the credit crunch, most of them have reverted to an attractive tracker interest rate of base rate plus 1.75 per cent, which is at present only 2.25 per cent.

B&B pays no interest on the bulk of its borrowings from the Government and the FSCS.

Mr Pym was confident that the taxpayer would be fully repaid:

“Although many aspects are grim, we are confident the outcome will be satisfactory for taxpayers.†There might even be a profit when the last mortgage was repaid, he said, although this was unlikely to be for many years.

The bank was taken into public ownership last September and its savings business and branches sold to Santander Group, of Spain, which last week announced plans to dump the B&B name. Mr Pym is in charge of winding down the rump business, which has 300,000 borrowers and outstanding mortgages of £41 billion.

Holders of subordinated debt were disappointed last week when B&B deferred paying the coupon on some notes, saving interest of about £10 million. Mr Pym said that the risk had been made plain to debt-holders in the business plan in March. “Our priority is to repay the FSCS before the subordinated debt,†he said. “It reflects the proper repayment hierarchy.â€

One glimmer of encouragement, according to Mr Pym, was that new early arrears — the number of borrowers just starting to fall behind on repayments — was declining for the first time. However, the overall problem would continue to worsen because of people already in arrears falling even further behind on payments. “Serious arrears are still getting worse,†he said.

He also warned that a rise in base rate could trigger a fresh wave of defaults. Rental properties are typically yielding 3-4 per cent, so any increase in interest rates would tip many landlords who are just covering their costs into difficulties.

“I'm a W man, not a V man,†Mr Pym said, explaining why he believes that Britain could be in only the first stage of a W-shaped recession.

B&B, which is based in Bingley, West Yorkshire, has redeployed staff to cope with the soaring level of customers in difficulty. Two hundred people worked in the arrears department a year ago; today it is 400.

Mr Pym, who retired as chief executive of Alliance & Leicester (A&L) just before the credit crunch hit, is taking more of a back seat and will downgrade from executive chairman to non-executive chairman this year after the appointment of Richard Banks, his former A&L colleague, as managing director.

He said that he had volunteered for a pay reduction in April this year from £750,000 to £350,000, acting on President Obama's dictum that no one in a bank owned by taxpayers should be paid more than $500,000 (£300,000). “I heard his speech and I thought: ‘That's the right thing to do and I'm going to do it.'â€

There was no immediate hope of selling B&B's loan portfolios at any but a deeply discounted and uneconomic price, he said. Many of the loans were now more than 100 per cent of the properties they are secured on; they were in arrears and they were “not seasonedâ€, or too recent to show a reassuring repayment track record.

Seeing our taxes working against us eh? Good one Gordon.

These numbers will be much higher in 2010, 2011, 2012 and beyond.

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The only surprise is that B & B lasted so long.... Ponzi/Pyramid Scam - pure and simple.

They say the pyramids of Egypt are over 3000 years old. Now that's a long time ;)

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