Can Northern Rock rescue the mortgage market?
As part of its nationalisation at the start of 2008, Northern Rock made a commitment to slim down its lending operations over a two-year period. This included increasing rates and criteria on new loans, but also “encouraging” up to 60% of existing customers to remortgage elsewhere.
However, this January Northern Rock revealed it planned to ditch this policy and slow the number of mortgage redemptions. The announcement, made at the same time as the government launched its second banking bail-out, including decreasing the lenders standard variable rate and “less actively” encouraging borrowers to move away.
On 23 February, after carrying out a strategic review, the Treasury made further announcements regarding Northern Rock; it will now extend its lending activities to issue £5 billion of new mortgages this year, increasing to £9 billion in 2010, eventually taking its mortgage book to £14 billion by 2011.
These new mortgages will be granted by a new and separate mortgage business within Northern Rock. The Treasury says each mortgage will "be made on commercial terms to ensure value for money for taxpayers", allowing Northern Rock to return to the UK’s mortgage market with a wide product range.
It has also confirmed that it will start to lend up to 90% of a property's value, despite the climate of falling house prices putting people at risk of going into negative equity. However, Northern Rock says 90% mortgages will be available on a very limited scale. They are also unlikely to be offered to first-time buyers, the group which traditionally has had to resort to low-deposit loans.
The news that Northern Rock is to increase the amount it lends been welcomed by some industry commentators, who say it will give some help to those looking to borrow and get on the property ladder as well as existing borrowers.
Lee Bramzell, chief executive of PropertyIndex.com, estimates that £14 billion of new lending could finance the sale of more than 126,000 properties.
This translates into approximately 14 additional sales per estate agent, per year, he adds.
The Council of Mortgage Lenders (CML) describes the new lending initiative as “another factor that may help to ease the continuing lack of supply of mortgage lending to the market”.
Prior to its downfall, and eventual nationalisation, Northern Rock was a significant player in the mortgage market, especially as it was the first bank to offer mortgages of 100% or more.
Michael Coogan, director general of the CML, says that by shrinking its mortgage book, Northern Rock inevitably put additional pressure on its lender peers, who in absorbing its rejected business had less funding for other borrowers.
"While other lenders will no doubt be watching carefully to assess the competitive impacts of Northern Rock returning to the market as an active mortgage lender, in overall market terms anything that improves the supply of lending is a positive,” Coogan adds. “By removing this market pressure, other lenders as well as Northern Rock should experience an increased capacity to lend to other borrowers."
The fact that the government is willing to let a state-owned bank take a bigger slice of the mortgage market has to be a positive sign, says Capital Economics.
“The move should provide a significant boost to the supply of mortgage credit available in the market,” says Ed Stansfield, property economist at Capital Economics. “Therefore, the new lending proposed by Northern Rock could boost total net lending by 12% this year and a further 20% in 2010.”
When you consider that mortgage lending has fallen by 52% over the past 12 months, with just £12.4 billion lent during January (according to the CML), this is a welcome boost.
But, is it enough to revive the mortgage and housing market?
No, says Stansfield. He argues that Northern Rock’s increase appetite for mortgage is unlikely to transform the mortgage market overnight, not least because the £14 billion figure will reverse only one-fifth of last year’s decline in net lending.
“Mortgage approvals need to more than double from recent levels just to return to them to the
troughs recorded in the early 1990s downturn, let alone anything that might be regarded as normal levels,” he explains.
In addition, Northern Rock has indicated that low-deposit mortgages – traditionally marketed at first-time buyers – will be restricted.
"Customers should not be fooled into thinking that the new Northern Rock will be anything like the old Northern Rock, who in its heyday offered mortgages well in excess of 100% of the property value and lending up to five times a borrowers' salary,” says Richard Mason, managing director at Moneyextra.com. “First-time buyers, buy-to-let investors and anyone without a big deposit will still struggle to buy a property.”
Stansfield agrees that, without first-time buyers, the housing market will struggle to return to health: “With the housing market still overvalued and the economy in a deep recession, we doubt that the resumption of lending by Northern Rock will act as a catalyst for a widespread relaxation in lending criteria that would allow larger numbers of first-time buyers back into the market.”
Geoff Tresman, chairman of Punter Southall Financial Management, is critical of the way the government has managed Northern Rock since it was nationalised. He argues that the policy of encouraging customers who could move to do so was nonsense as it effectively left the bank with “a book of second-rate suspect debt”.
“It is complete nonsense for the bank to have engaged on such an active campaign to rid itself of good debt, whilst retaining bad debt and now, within a year, reverse that stance,” says Tresman.
Louise Cuming, head of mortgages at price comparison site moneysupermarket.com, agrees that this sudden U-turn is confusing: "This should have been the government's policy for Northern Rock from the outset so - while it is a case of better late than never - it is very late indeed.”
Cuming is equally unconvinced that the U-turn will have much of an impact on mortgage lending generally. "The level of lending the government wants Northern Rock to reach is little more than a drop in the ocean,” she explains. “Mortgage lending is falling all the time and Northern Rock's re-entry at this type of level won't be enough to stop the rot.”
Politicians are also sceptical. "The government has put the cart before the horse,” says Vince Cable, the Liberal Democrat shadow chancellor. “Before spending billions of pounds of taxpayers' money on new lending, ministers must set out in detail the basis on which future lending must take place.
"Otherwise many of the past problems of excessive lending leading to negative equity and repossessions could be recreated. Any new lending must be done on a safe basis.”
Northern Rock has said its new lending will be financed by a combination of savers’ deposits, government funding and a “legal and capital restructuring” of the bank. But while these measures should enable it to increase its lending, the problems that have seen the mortgage market freeze will not go away.
Funding for lending is still expensive or restrictive for lenders. In addition, there is still not enough confidence among consumers about buying property to see a revival anytime soon.
If greater lending through Northern Rock does fail to kick-start lending across the board, there are concerns about what additional action the government could take. One option is taking all banks into public ownership.
“If lending fails to respond, [Northern Rock’s announcement] may ultimately be seen as paving the way for the government to set direct lending targets for other banks in which it holds a majority stake, if not the banking sector as a whole,” warns Stansfield.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
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