19 June 2008 / by Rachael Stiles
Northern Rock may be exacerbating the problems in the mortgage market facing British homeowners by withdrawing too large a portion of its mortgage range in order to repay its debt to the Bank of England.
The nationalised bank still owes the taxpayer more than £20billion, but has paid back as much as £3-£4billion in the 10 weeks since March, according to analysis by New Star economist Simon Ward. Repaying the loan too quickly is draining potential mortgage funding from desperate homeowners.
While the Treasury, Bank of England and the taxpayer may be breathing a sigh of relief that the loan is being repaid faster than anticipated, and they will be released from the £75billion guarantee allowed to Northern Rock’s depositors, it equates to fewer mortgage deals for consumers who are trying to remortgage or get on the property ladder.
The funds for repaying the loan are thought to be coming from mortgage redemptions from customers who cannot afford to remortgage at Northern Rock’s elevated interest rates – increased intentionally to deter customers are force them to remortgage with another lender while the bank undergoes a dramatic downsizing.
Last year, Northern Rock contributed £13billion to total mortgage lending of £108billion. This year, total lending is expected to be about half that of 2007 at approximately £55billion, so Northern Rock’s significant withdrawal from the market will cut the amount of credit available by a considerable amount.
Meanwhile, lawyers acting for the bank are considering bringing legal action against the previous management team for causing the collapse of one of the country’s biggest mortgage lenders.
An aggressive lending model and poor savings deposits combined with a heavy reliance on wholesale money markets are being blamed for the first run on a British bank for more than a century. The Treasury is also fighting legal action from Northern Rock’s shareholders, which are demanding compensation over their dilapidated shares, which are practically worthless since the bank was nationalised.
Previous chairman, Adam Applegarth, is at the centre of the blame, along with other board members who were at the helm when the bank started to go under. Mr Applegarth maintains it is the Bank of England and the Treasury that are at fault. He accuses them of standing by whilst the bank took on water, standing in the way of a potential sale to Lloyds TSB and only coming in when it was too late for recovery, blocking a sale of the bank to bidders Olivant and Virgin Money and taking it into public ownership.
The Financial Services Authority has admitted fault for approving the bank’s high-risk business strategy and failing to adequately fulfil its regulatory role.
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