Struggling U.K. lender must buy toxic GMAC mortgages

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Bradford & Bingley, the troubled UK lender, must buy $2.1 billion pounds worth of mortgages from GMAC as part of an agreement reached in 2006. The purchase must be completed by the end of the year per the terms of the agreement. The timing couldn’t be worse for the UK lender, who is struggling to raise capital of its own to battle through the credit crunch.

To add insult to injury the GMAC loans are performing much worse than those originated by Bradford & Bingley. These are the types of agreements that can sink either bank. If Bradford & Bingley can’t come up with the cash they’ll be in default of the agreement which could impact other GMAC agreements and its cash reserves.

From Bloomberg on the ill-timed purchase:

Bradford & Bingley Plc, the U.K. lender struggling to raise cash in a rights offering, must honor a 2006 deal to buy about 2.1 billion pounds ($4.1 billion) of mortgages by the end of next year from GMAC LLC.

Customer payments are more than three months late on 5 percent of loans already purchased from Detroit-based GMAC, the car and home lender trying to avert bankruptcy for its residential mortgage unit. That’s more than double the average rate for mortgages held by the Bingley, England-based bank, it said yesterday in a statement.

“This is what has spooked everybody,” said Alan Beaney, who manages $2.1 billion of stocks as head of investments at Principal Investment Management in Sevenoaks, England. “They are committed to keep buying these things.”

Rising loan defaults were “by far the biggest factor” in Bradford & Bingley’s decision to sell a 23 percent stake to U.S. leveraged buyout firm TPG Inc., Chairman Rod Kent told analysts on a conference call. The bank fell 24 percent in London trading yesterday, the most since an initial public offering in 2000, after it slashed the price of the rights offering by a third and said the U.K. housing market is deteriorating.

The bank first agreed in 2002 to buy loans from GMAC. Steven Crawshaw, who stepped down June 1 as Bradford & Bingley’s chief executive officer, renewed the deal in December 2006 and committed to buy as much as 4 billion pounds of loans a year through 2009.