Bradford & Bingley, the buy-to-let mortgage lender nationalised five weeks ago, has seen a rise in arrears in its mortgage book triggering fears the taxpayer could be exposed to potential losses.
B&B was taken into state control after the collapse of Lehman Brothers shook confidence in the global banking system. B&B's branches and savings operations were transferred to Santander of Spain leaving the taxpayer with B&B's £42bn mortgage loan book, which is expected to run down over time.
Yesterday Moody's, the ratings agency, said mortgages that were three months in arrears at B&B's Aire Valley Master Trust - B&B's mortgage securitisation vehicle - jumped to 2.3 per cent of the loan book in the third quarter. This was up from 0.8 per cent in the same period in 2007.
The third-quarter numbers show a deterioration from the second quarter when arrears were 1.45 per cent.
The figures underline concerns about the quality of B&B's mortgage loan book because its securitisation programme contains only the best quality mortgages that were written by B&B.
B&B's securitisation programme does not include any of the riskier mortgage loans that B&B acquired from GMAC, the former financing arm of General Motors. The GMACoriginated loans have experienced a much sharper deterioration in credit quality than B&B's own loan book.
When B&B was nationalised, a complex deal was struck between the Treasury and the Financial Services Compensation Scheme, which pays out when banks collapse.
This in effect means loan losses in B&B's mortgage book would have to reach relatively high levels before the taxpayer lost money.
If B&B's loan book suffers worse-than-expected losses on its risky loans, the FSCS will then impose a levy on the banking industry to cover any shortfall.
This has been seen as a better way of minimising risk to the taxpayer because the banks would shoulder much of the risks if B&B's mortgages turned sour.
The latest data released by Moody's show that buy-to-let loans have performed much better than mainstream mortgage loans.
This tallies with the latest data from the Council of Mortgage Lenders that show 1.1 per cent of all buy-to-let mortgages outstanding are now in arrears of three months or more. This compares with a figure of 1.33 per cent in arrears for the total mortgage market.
However, buy-to-let is a relatively new product that only became available to retail investors in the mid- 1990s and no one knows how it will perform through a recession.
See Lombard
