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Bradford & Bingley (BB-), the UK's biggest buy-to-let mortgage lender, has seen its share price dive this morning following its announcement of a 50% fall in profit and a new American investor coming on board with a 23% stake in the business.

Texas Pacific Group (TPG), a US private equity firm, has

agreed to pump £179 million into Bradford & Bingley - a move that will make it the lender's largest shareholder. The news comes as the lender reveals nearly a 50% fall in profits in the first four months of 2008, and reports a rise in the number of people defaulting on their mortgage repayments.

The mortgage lender has today also confirmed its rights issue, which will allow it to raise £258 million. All shares will be issued at an offer price of 55p per share. This move is the latest rights issue within the banking sector, as Bradford & Bingley follows in the footsteps of RBS and HBOS. See the recent iBall exploring the move by these two banking giants.

Bradford & Bingley temporarily suspended share trading this morning as it made its announcement. However, following share trading restoration, it had seen its share price drop by over 20% to around 74p by 10.30am. A slight recovery to  86p had been made by 11.30am.

The performance of fellow banks didn't quite match the plummet of Bradford & Bingley this morning, but still saw drops. By 11.30am, HBOS (HBOS) had seen its price fall by 7.56%, while Royal Bank of Scotland (RBS) was sitting at 225p - a 3.25p drop. Debate is raging on our discussion boards as to whether RBS is a recovery play. Do you agree? Have your say

News in brief

• Bradford & Bingley will raise additional capital of £400 million - £258 million through a rights issue and £179 million from TPG's investment.
• All shares will be issued at an offer price of 55p per share.
• Underlying profits for the first four months of 2008 were £56 million compared to £108 million in 2007.
• The percentage of mortgages three months or more in arrears has increased to 2.16% of Bradford & Bingley's total mortgage book, from 1.63% at the end of last year.
• Bradford & Bingley's group chief executive, Steven Crawshaw, has stepped down as a result of a serious illness, and will be replaced by chairman Rod Kent.
• Bradford & Bingley reports an increase in retail deposits such as savings accounts, with inflows of £2 billion to the end of May 2008.

Is this another Northern Rock?

Unlike Northern Rock - which was forced to ask the Bank of England for emergency funding to support its business model - Bradford & Bingley is making moves to strengthen its capital position to ensure its finances are healthy enough to withstand what looks set to be a tough year for mortgage lenders.

The advice to borrowers and savers with Bradford & Bingley is not to panic. Many of the big banks are also doing rights issues to obtain additional funding from their shareholders.

In addition, the news that an American investor is prepared to put money into the business is a good sign for Bradford & Bingley's future.

Matthias Calice, a partner at TPG, says: "We believe that [Bradford & Bingley's] superior market position, coupled with this injection of capital provides the platform for potential growth and profitability."

There's been plenty of conjecture regarding the state of the banking sector, with today's news adding more fuel to the fire that it's on its knees. For an expert's view on the current banking landscape, iBall TV recently interviewed Joe Everitt from ODL Securities. See the interview here

How did this happen?

Bradford & Bingley is the UK's biggest buy-to-let mortgage lender, claiming around a fifth of this £120 billion market. However, the credit crunch and downturn in the housing market has had a severe impact on buy-to-let investors - meaning lending opportunities have also been restricted.

Many landlords have been struggling to secure finance for new purchases while others have found that increased mortgage rates mean the rents they charge do not cover their outgoings.

In addition to the squeeze on buy-to-let lending, Bradford & Bingley has, like other lenders, had to cope with the increased cost of funding. This has not only restricted the amount of lending it is able to do but has also reduced the profit margin on new mortgages.

Another factor hitting Bradford & BIngley is a rise in the number of borrowers failing to pay their mortgages. However, as it points out in its financial results, this is not necessarily a sign of lax lending on its part.

It says the arrears performance of "organically originated" mortgages, particularly buy-to-let, have proved substantially better than acquired mortgages.

However, a mortgage book is acquired from another large buy-to-let lender - GMAC-RFC - has products higher than expected arrears. Bradford & Bingley says it has already cut back its purchases from GMAC-RFC.

And, like other lenders, Bradford & Bingley has not been immune to the rise in mortgage fraud. It has had to set aside £15 million to cover this type of organised crime although it says it may be able to cover losses through its insurance policy.

As a result of the credit crunch, the lender says it is taking a more prudent approach to lending. This includes demanding bigger deposits from mortgage borrowers and putting more effort into ensuring borrowers pay back their debt.

What does this mean to the banking sector? Discuss with other investors here