June 3 (Bloomberg) -- Bradford & Bingley Plc, the U.K. lender struggling to raise cash in a rights offer, 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, whose mortgage unit disclosed in a filing today it got $2.88 billion in emergency funding. That arrears rate is more than double the average 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 its initial public offering in 2000, after it slashed the price of the rights offer by a third and said the U.K. housing market is deteriorating.

The bank, which provides one in five buy-to-let loans in the U.K. rose 1.9 percent to 68.25 pence in London today, valuing it at 421.6 million pounds. The shares have dropped 75 percent this year, the worst performance in the FTSE All-Share Bank Index.

Late Payments

Bradford & Bingley first agreed in 2002 to buy loans from GMAC, now controlled by Cerberus Capital Management LP, the New York-based private equity firm. Steven Crawshaw, who stepped down June 1 as Bradford & Bingley's chief executive officer, formalized the deal in December 2006 and committed to buy as much as 4 billion pounds of loans a year through 2009.

The bank reduced its purchases of GMAC loans to ``the minimum under contract,'' or about 1.4 billion pounds a year, the company said. Bradford & Bingley is required to buy the loans ``only if GMAC can originate them,'' spokesman Neil Vanham said.

Arrears for Bradford & Bingley's acquired mortgages ``have been higher than anticipated,'' the bank said. Late payments on its 409 million pounds of GMAC loans rose to 5.04 percent in April from 3.3 percent at year end. The U.K.'s overall arrears rate on buy-to-let loans in the first quarter was about 1 percent, the Council of Mortgage Lenders said last month.

The GMAC loans are ``materially worse quality than Bradford & Bingley's self-sourced book,'' said Alex Potter, a London-based banking analyst at Collins Stewart who rates the stock ``sell.''

Bradford & Bingley agreed in April 2007 to buy as much as 2 billion pounds of mortgages over two years from London-based Kensington Group Plc. The agreement with Kensington, purchased this year by Investec Corp., includes so called self-certification loans in which borrowers verify their own incomes.

`Too Many Mistakes'

``We've made too many mistakes recently,'' Kent told analysts on the conference call. ``It's my job to correct those.''

The bank slashed the price yesterday on the rights offering, reducing Bradford & Bingley's proceeds to 221 million pounds after fees. The bank also agreed to sell the stake to TPG for 179 million pounds. The injection by Fort Worth, Texas-based TPG comes almost nine months after the U.K. government bailed out Northern Rock Plc, which was nationalized this year.

Bradford & Bingley originally planned to offer investors rights to buy 16 shares for every 25 they own at 82 pence apiece. The bank now will offer 19 shares for every 25 at a price of 55 pence apiece, the statement said.

`Kicked in the Face'

``It shows that there are limits to banks' ability to raise capital at any price,'' said David Goldman, senior portfolio strategist at Asteri Capital in New York. ``Bradford & Bingley is the first really major firm that tried to do that and got kicked in the face by the market.''

The offering is underwritten by UBS AG and Citigroup Inc., who were close to pulling out before TPG agreed to buy a stake, the Daily Telegraph reported, citing people familiar with the situation. UBS and Citigroup said the bank's previously undisclosed loss for the first four months of the year justified their withdrawal, the newspaper said. Bradford & Bingley spokeswoman Katherine Conway declined to comment on the report.

Adam Castellani, a London-based spokesman for Citigroup, declined to comment, as did a spokeswoman for UBS.

``The question that many will ask is why was the previously agreed and fully underwritten deal canceled,'' Keefe, Bruyette & Woods Ltd. analysts said in a note to clients yesterday. ``There may well be speculation that further issues lurking within the loan book led to a renegotiation,'' said analysts led by James Hutson, who cut his rating on the stock to ``underperform'' because of the ``shock'' increase in customer arrears and the credit quality of the GMAC loans.

Downgrade

Fitch Ratings yesterday cut its long-term issuer default rating one level on Bradford & Bingley to ``A-'' from ``A'' and placed it on ``watch negative.''

Standard & Poor's Rating Services lowered the bank's short- term credit rating one level to A-2. The ratings company said the lender's credit rating remains on negative watch because of the ``sharp deterioration'' in the quality of its mortgage book.

``Not only has the deterioration been extremely rapid in recent weeks, but also that B&B's own management information may have been inadequate,'' S&P said in a statement yesterday.

Cerberus Capital Management LP and GMAC will prop up GMAC's Residential Capital LLC with at least $2.88 billion in funding after other rescue plans for the mortgage unit failed. GMAC and Cerberus stepped in after the unit fell $2 billion short in meeting its debt obligations this month.

Under the funding agreement, Cerberus will buy as much as $950 million of performing and non-performing mortgages, ResCap said. The private equity firm, founded by Stephen Feinberg, will also buy $475 million of model-home assets.

To contact the reporters on this story: Jon Menon in London at jmenon1@bloomberg.net; Poppy Trowbridge in London at trowbridge@bloomberg.net

Last Updated: June 3, 2008 13:40 EDT