Bradford & Bingley Ukar Sale

[Bland Unsight]

The sale of the Bradford & Bingley mortgage book sitting in United Kingdom Asset Resolution was confirmed in the Budget.

Following the recent successful sale of £13 billion of former Northern Rock mortgages, the Treasury, UK Financial Investments (UKFI) and UKAR have been exploring further sales of UKAR mortgages: in particular, a programme of sales designed to raise sufficient proceeds for Bradford & Bingley to repay the £15.65 billion debt to the Financial Services Compensation Scheme (FSCS) and, in turn, the corresponding loan from the Treasury. It is expected that this programme of sales will have concluded in full before the end of 2017-18.

Source: Budget 2016 Policy Paper

Bradford & Bingley's buy-to-let lender, Mortgage Express, accounts for most of the loan book.

Source: UKAR B&B 2015 annual report

There's some 'interesting' commentary in the trade press.

During his Budget this week, the Chancellor confirmed that the government would sell off £16bn of its Bradford and Bingley assets, helping to repay debt owed to the Financial Services Compensation Scheme.

However, with these loans made up mostly of buy-to-let assets, the Intermediary Mortgage Lenders Association (IMLA) said that uncertainty around whether Basel proposals are to be implemented could prevent a sale from even taking place.

Peter Williams, executive director of IMLA, said: “There is a good chance the sale of these assets will be compromised as a result of proposals being considered by the Basel Committee. If implemented, these would require any buyer of the mortgages to hold almost three times as much capital against them as they would today.

Source: Basel proposals could ‘compromise’ Bradford and Bingley asset sale, Mortgage Strategy, 18 March 2016

There is an alternative perspective to the IMLA argument, which is that if you are going to shut down the BTL industry, you ought to get shot of your £18bn worth of crappy BTL loans at whatever price the market can bear. The NRAM book was sold in 2015 to Cerebus who are, to use the technical parlance, grown-ups well capable of arranging their own financing and taking a view about the interest they'll have to pay on financing any funding, even after BCBS risk-weights alter the capital costs attached to any lending by the banks to them. I always wonder who this weak as shit IMLA logic is aimed at. Anybody with any familiarity with even the most rudimentary elements of the situation surely just laughs at it, and anybody ignorant enough to be taken in by it wouldn't be interested.

Hence we can paint a situation whereby come 2018 all the PovertyLater Mortgage Express mortgages are held by Cerebus. The Court of Appeal has upheld the West Brom decision and Cerebus can bump the mortgages to something aligned with market SVRs. BCBS risk-weight implementation is coming down the tracks and market SVRs have risen markedly above 2016 levels of about 5%, and of course, you've already lost most of the tax deductibility of your mortgage interest. Balance of probabilities, all of this will happen.

Sell now, sell everything.

Edited March 18, 2016 by Idlewild

[Tapori]

The sale of the Bradford & Bingley mortgage book sitting in United Kingdom Asset Resolution was confirmed in the Budget.

Source: Budget 2016 Policy Paper

Bradford & Bingley's buy-to-let lender, Mortgage Express, accounts for most of the loan book.

Source: UKAR B&B 2015 annual report

There's some 'interesting' commentary in the trade press.

Source: Basel proposals could ‘compromise’ Bradford and Bingley asset sale, Mortgage Strategy, 18 March 2016

There is an alternative perspective to the IMLA argument, which is that if you are going to shut down the BTL industry, you ought to get shot of your £18bn worth of crappy BTL loans at whatever price the market can bear. The NRAM book was sold in 2015 to Cerebus who are, to use the technical parlance, grown-ups well capable of arranging their own financing and taking a view about the interest they'll have to pay on financing any funding, even after BCBS risk-weights alter the capital costs attached to any lending by the banks to them. I always wonder who this weak as shit IMLA logic is aimed at. Anybody with any familiarity with even the most rudimentary elements of the situation surely just laughs at it, and anybody ignorant enough to be taken in by it wouldn't be interested.

Hence we can paint a situation whereby come 2018 all the PovertyLater Mortgage Express mortgages are held by Cerebus. The Court of Appeal has upheld the West Brom decision and Cerebus can bump the mortgages to something aligned with market SVRs. BCBS risk-weight implementation is coming down the tracks and market SVRs have risen markedly above 2016 levels of about 5%, and of course, you've already lost most of the tax deductibility of your mortgage interest. Balance of probabilities, all of this will happen.

Sell now, sell everything.

Good insight. It further confirms the young'uns at the treasury have convinced George to go for BTL portion of the market to bring down prices and raise revenue.

Everyone wins.

[The Knimbies who say No]

The sale of the Bradford & Bingley mortgage book sitting in United Kingdom Asset Resolution was confirmed in the Budget.

Source: Budget 2016 Policy Paper

Bradford & Bingley's buy-to-let lender, Mortgage Express, accounts for most of the loan book.

Source: UKAR B&B 2015 annual report

There's some 'interesting' commentary in the trade press.

Source: Basel proposals could ‘compromise’ Bradford and Bingley asset sale, Mortgage Strategy, 18 March 2016

There is an alternative perspective to the IMLA argument, which is that if you are going to shut down the BTL industry, you ought to get shot of your £18bn worth of crappy BTL loans at whatever price the market can bear. The NRAM book was sold in 2015 to Cerebus who are, to use the technical parlance, grown-ups well capable of arranging their own financing and taking a view about the interest they'll have to pay on financing any funding, even after BCBS risk-weights alter the capital costs attached to any lending by the banks to them. I always wonder who this weak as shit IMLA logic is aimed at. Anybody with any familiarity with even the most rudimentary elements of the situation surely just laughs at it, and anybody ignorant enough to be taken in by it wouldn't be interested.

Hence we can paint a situation whereby come 2018 all the PovertyLater Mortgage Express mortgages are held by Cerebus. The Court of Appeal has upheld the West Brom decision and Cerebus can bump the mortgages to something aligned with market SVRs. BCBS risk-weight implementation is coming down the tracks and market SVRs have risen markedly above 2016 levels of about 5%, and of course, you've already lost most of the tax deductibility of your mortgage interest. Balance of probabilities, all of this will happen.

Sell now, sell everything.

One wonders what price the B&B book will achieve. Worthy of a speculation thread for a bit of fun imo. Quite complex for bidders/Govt- agreeing pricing on a maxed out MEW-moar loan, where maybe a potential CGT liability exists. Just suppose cashflows turn sour for some unknown reason in the next few years and a sale is forced, crystalising the liability, allowing Govt back into the picture to recover more dough. Nothing a potential bidder wouldn't know about of course, but it seems like there will is a lot of potential for large writedowns, especially since there must be a questionmark over the ability of interest rate rises by a new owner to result in extra cash given many LL are barely making money now. That said, if rate rises by a new owner are just a means of getting a smalltime LL to fold and then allowing the lender to go after the LL's other assets like their main residence etc then maybe that is also something worth considering.

Edited March 18, 2016 by The Knimbies who say No

[Bland Unsight]

One wonders what price the B&B book will achieve. Worthy of a speculation thread for a bit of fun imo. Quite complex for bidders/Govt- agreeing pricing on a maxed out MEW-moar loan, where maybe a potential CGT liability exists. Just suppose cashflows turn sour for some unknown reason in the next few years and a sale is forced, crystalising the liability, allowing Govt back into the picture to recover more dough. Nothing a potential bidder wouldn't know about of course, but it seems like there will is a lot of potential for large writedowns, especially since there must be a questionmark over the ability of interest rate rises by a new owner to result in extra cash given many LL are barely making money now. That said, if rate rises by a new owner are just a means of getting a smalltime LL to fold and then allowing the lender to go after the LL's other assets like their main residence etc then maybe that is also something worth considering.

The NRAM sale garnered very little interest and their was IIRC no mainstream analysis of whether or not the Treasury had come out ahead or not, (I tried and failed to find out how the price paid compared to the book value of the mortgages, but my obsession has moved on to BTL almost exclusively now, so I didn't look that hard ).

It would be interesting to see whether the B&B loan book could be off-loaded at a considerable discount (relative to their book value) without garnering any interest at all, much less any political heat.

[Neverwhere]

Money Marketing - Lenders tee-up £17bn Bradford & Bingley financing deal

And now Sky News reports that six lenders are to present the Government with a proposal to establish a special purpose vehicle to house the loans ahead of a possible sale.

The banks – Barclays, HSBC, Lloyds, Santander and RBS – and Nationwide will reportedly offer £17bn of financing to the eventual purchasers of the loans as part of a project to end their own exposure to interest on the loans used to fund it during the financial crisis.

Looks like the loans may be heading off of UKAR's books and into an SPV with little trouble, and the banks involved will then (assuming the financing terms are favourable) offer a sweetner to attract a final purchaser?

[Neverwhere]

Might the banks be intending to package the loans up into tranches (say, on LTV and portfolio size, for instance) in order to attract a higher price for the best quality loans (i.e. those where the borrower is likely to have sufficient assets to cover off any risk of negative equity or arrears)?

[Neverwhere]

There's some more detail on the possible deal here:

High Street Banks Plot Secret £17bn B&B Deal

The group of banks, along with Nationwide, the UK's biggest building society, wants to help remove the B&B portfolio from the Government's balance sheet because they are liable for the interest on the loan that was used to fund it during the 2008 financial crisis.

[dgul]

Doesn't it look like their aggressive tactics has resulted in quite a large proportion of their 'standard residential mortgage' holders jumping ship, while relatively few BTL and self-cert have moved? Does this suggest that even with the encouragement of UKAR to get them off their books, there isn't anywhere else to go...?

[Bland Unsight]

Might the banks be intending to package the loans up into tranches (say, on LTV and portfolio size, for instance) in order to attract a higher price for the best quality loans (i.e. those where the borrower is likely to have sufficient assets to cover off any risk of negative equity or arrears)?

Precious little to go on, but it strikes me as kind of funny. By those figures the banks are paying HMT £400m on a £17,000m loan, i.e. about 2.4%. As the Treasury can finance that for less it looks to be a modest little money spinner, particularly as at present the loan book is performing OK.

I can't see how the banks would get involved in tranching. It seems to be suggesting that they are willing to guarantee financing to a buyer, i.e. HMT would still have to decide how to structure the sale and to whom it would be sold, but the banks are promising to offer a lending facility to the purchaser to fund the purchase.

[Bland Unsight]

Doesn't it look like their aggressive tactics has resulted in quite a large proportion of their 'standard residential mortgage' holders jumping ship, while relatively few BTL and self-cert have moved? Does this suggest that even with the encouragement of UKAR to get them off their books, there isn't anywhere else to go...?

One of the jokers in the pack here is that some of these BTL borrowers will be on very attractive deals (e.g. lifetime trackers) and will not have the LTV to access equally competitive deals in the market, (e.g. they may have 80% LTV, but not 60% LTV). Essentially, some of them would be mad to refinance if they didn't have to, and they don't have to, so they don't.

[Neverwhere]

Precious little to go on, but it strikes me as kind of funny. By those figures the banks are paying HMT £400m on a £17,000m loan, i.e. about 2.4%. As the Treasury can finance that for less it looks to be a modest little money spinner, particularly as at present the loan book is performing OK.

I can't see how the banks would get involved in tranching. It seems to be suggesting that they are willing to guarantee financing to a buyer, i.e. HMT would still have to decide how to structure the sale and to whom it would be sold, but the banks are promising to offer a lending facility to the purchaser to fund the purchase.

As I read it they're also offering to set up a special purpose vehicle to take the loans off of the government's hands while they try to find a buyer/buyers...

[monkeyman1974]

If you were buying this predominantly BTL loan book, you'd have the comfort that generally speaking you'd have whatever equity is within the properties as security alongside the assets of the BTL borrower (primary residence, cash etc) - so I suspect it's actually a much safer book than the headlines suggest. Add that to the ability to ramp the SVRs and you might find it sells at what looks like an aggressive price when in reality it'll be a fat cow to milk for years to come.

[Neverwhere]

If you were buying this predominantly BTL loan book, you'd have the comfort that generally speaking you'd have whatever equity is within the properties as security alongside the assets of the BTL borrower (primary residence, cash etc) - so I suspect it's actually a much safer book than the headlines suggest. Add that to the ability to ramp the SVRs and you might find it sells at what looks like an aggressive price when in reality it'll be a fat cow to milk for years to come.

That's definitely true for some of the loans but not for any lending to large portfolio landlords, which is inherently riskier because they can't possibly have enough personal assets to cover off shortfalls across their entire portfolio. I also suspect that many of the BTLers who are still on UKAR's books are there because they're on very favourable trackers and so won't revert to SVRs. However, I still think you're right because the West Brom case shows that BTL lenders have the right - where they have included appropriately worded clauses in their T&Cs - to hike tracker differentials when business considerations require it.

[MrPin]

If you were buying this predominantly BTL loan book, you'd have the comfort that generally speaking you'd have whatever equity is within the properties as security alongside the assets of the BTL borrower (primary residence, cash etc) - so I suspect it's actually a much safer book than the headlines suggest. Add that to the ability to ramp the SVRs and you might find it sells at what looks like an aggressive price when in reality it'll be a fat cow to milk for years to come.

I believe you may be right! Basically BTLs have chosen to been owned by the bank.

[Neverwhere]

I believe you may be right! Basically BTLs have chosen to been owned by the bank.

And amusingly many of them would have us believe that they made that choice because they don't trust bankers.

[Bland Unsight]

If you were buying this predominantly BTL loan book, you'd have the comfort that generally speaking you'd have whatever equity is within the properties as security alongside the assets of the BTL borrower (primary residence, cash etc) - so I suspect it's actually a much safer book than the headlines suggest. Add that to the ability to ramp the SVRs and you might find it sells at what looks like an aggressive price when in reality it'll be a fat cow to milk for years to come.

Just out of idle curiosity I dug out the investors' reports for the B&B Master Trust to look at the LTV distributions. The March 2009 date is somewhat arbitrary (they reorganised how they issued the reports at that date). As you expect HPI has worked its magic on the bag of shite that represents the B&B balance sheet.

The value of loans drops from £12bn to £8.5bn between the two reporting points. Bearing that in mind, here's the state of play in the latest report. Both charts use the value basis percentages and the indexed valuations. Over 90% of the mortgages in the master trust are interest-only (93.46% at February 2016) and they are almost all trackers (99.61%). Four fifths are BTL.

[Bland Unsight]

It appears that Cerberus paid more than the book value of the mortgages for the NRAM loan book.

Cerberus paid £280m over the value of the book at 30 June 2015 when the deal was approved and has agreed to sell £3.3bn of the Northern Rock assets to TSB Bank.

Source: UKAR sells £13bn Northern Rock book to Cerberus: TSB to purchase £3.3bn, Mortgage Strategy, 13 November 2015

[Neverwhere]

It appears that Cerberus paid more than the book value of the mortgages for the NRAM loan book.

Source: UKAR sells £13bn Northern Rock book to Cerberus: TSB to purchase £3.3bn, Mortgage Strategy, 13 November 2015

Hadn't UKAR already written the book value down by a significant amount?

[Bland Unsight]

Hadn't UKAR already written the book value down by a significant amount?

Don't think so. The book is behaving itself, in terms of arrears, and given its geographical concentration (if the master trust is representative of the whole book) as it's 50% in London and the South the LTVs are much healthier at present. Hence for the time being even non-performing loans probably won't lead to losses.

It is a house of cards, but if you are willing to assume that house prices will hold up, that you'll be able to fund the lending cheaply enough to make money on the lending and that market interest rates will stay low enough and rents will stay high enough that the rents on the BTL lending cover the interest expense falling on the borrowers then you can carry the loans at their book value. The house of cards has done very well for eight years.

[Neverwhere]

Don't think so. The book is behaving itself, in terms of arrears, and given its geographical concentration (if the master trust is representative of the whole book) as it's 50% in London and the South the LTVs are much healthier at present. Hence for the time being even non-performing loans probably won't lead to losses.

It is a house of cards, but if you are willing to assume that house prices will hold up, that you'll be able to fund the lending cheaply enough to make money on the lending and that market interest rates will stay low enough and rents will stay high enough that the rents on the BTL lending cover the interest expense falling on the borrowers then you can carry the loans at their book value. The house of cards has done very well for eight years.

I think I may have been misremembering UKAR writing down the value of aspects of NRAM/Northern Rock itself, sorry!

AIUI the Cerberus deal went through just before the Summer Budget but they don't seem to have kicked up a fuss after the BTL tax changes were announced (and may possibly have been given something of a heads up) and Basel III was already firmly in the pipeline at that point, so it looks like there's every reason to think a similarly favourable deal could be done on the B&B loan book.

I think your house of cards argument above might also work even if house prices aren't assumed to hold up: as long as borrowers can continue to service their loans then there may be room for the lender to make enough profit over the lifetime of the loans, even considering that there may be a significant shortfall between final sale prices and money owing, to make the deal worthwhile (also, even in the event of a serious crash nominal house prices might possibly recover by the time of sale if the remaining term is long enough, even though that could still represent a significant ongoing crash in real terms that would be neither here nor there from the lenders' perspective).

If, as seems likely, there are differential hike clauses in the standard B&B BTL T&Cs that could also reduce the risk attached to the purchase, as the buyer would have the opportunity to fall back on them in the event that Basel III risk weights - or increased funding costs generally - made the current differentials unprofitable.

[Bland Unsight]

If, as seems likely, there are differential hike clauses in the standard B&B BTL T&Cs that could also reduce the risk attached to the purchase, as the buyer would have the opportunity to fall back on them in the event that Basel III risk weights - or increased funding costs generally - made the current differentials unprofitable.

Funny you should mention that as I've just been reviewing Richard Pym's evidence to the TSC banking crisis inquiry, (Pym was the B&B Chairman when it hit the rocks).

Q363

Jim Cousins: Bradford & Bingley had a very attractive set of terms for the end of the fixed rate deals for buy-to-let. Is it the intention that the nationalised Bradford & Bingley will honour those terms?

Mr Pym: The standard terms for buy-to-let mortgages was at the time you reach the end of your incentive period the customer moved to paying base rate plus 1.75%, so with a 3% base rate that means the majority but not all of the buy-to-let customers will pay 4.75%. That is certainly an attractive rate.

Q364

Jim Cousins: So we have a situation in which not only does the Government now have quite a significant stake in the whole future of buy-to-let in the UK, but it is going to honour the arrangements that Bradford & Bingley made so that the refinancing of those deals is being done on a very attractive basis.

Mr Pym: The customers have that benefit in their contract and they are entitled to maintain it. It is not an issue over which we can vary it or, frankly, would wish to vary it. It would be unfair to customers to take away any benefit that is enshrined in their original lending agreement.

Q365

Jim Cousins: Yes. There is an interesting issue there to consider: both the public expenditure and housing market consequences of that arrangement.

Mr Pym: But at the time those were quite wide margins, and there are plenty of residential lenders—that is a normal home mortgage for an owner/occupier—with what are called “go-to” rates of less than 1% above base rate; so this buy-to-let margin is wider. The rate of 4.75% might seem an attractive rate to the customer, but there are plenty of residential mortgages which would now be less than 4%.

Q366

Jim Cousins: It does seem odd, though, does it not, that at this particular point in the housing market we have the Government, through Bradford & Bingley, offering an element of public subsidy compared to other actors in the buy-to-let market in respect of buy-to-let mortgages?

Source

This is the reason why the BTL gang have not refinanced out of Mortgage Express. When the original deals ended they kicked across not to SVRs but to base rate +1.75%, so 2.25%. Nice work if you can get it.

As many of the BTL tw@ts at PovertyLater have enjoyed a dead bank's promises being kept by the Treasury their ingratitude to George Osborne beggars belief.

It will be interesting to see how this plays out. If the loans are sold on without the ability to hike the rates then you'll have to sell well below book value. If UKAR use the decision in the West Brom case to use similar in extremis clauses to hike the Mortgage Express rates then obviously you could sell the book at its nominal value. UKAR would take the political heat for the rate hike and then sell the book on to a buyer who would enjoy the benefit of being able to charge a market rate for the lending.

So, what you you do if you were a Chancellor trying to balance the books and you'd already burned your bridges with the BTL gang (and thus would suffer no further political costs for continuing the brutal beat down)?

[Bland Unsight]

[Neverwhere]

[Bland Unsight]

Just noticed that the bear is doing a slightly different step to the others. When he kicks his left leg he leads with his knee not his foot. Bloody contrarian bears. Why can't they just follow the crowd.

[Neverwhere]

Just noticed that the bear is doing a slightly different step to the others. When he kicks his left leg he leads with his knee not his foot. Bloody contrarian bears. Why can't they just follow the crowd.