Lender most associated with reckless lending before credit crunch resumes 90% mortgages as it prepares to return to private sector
Northern Rock introduced a new range of higher-risk mortgages to boost profits as it prepares to return to the private sector three years after lax lending practices led to its bailout and nationalisation.
The state-owned bank is offering three new mortgages each requiring a 10% deposit from borrowers – down from a previous 15% minimum. The new mortgages charge a higher interest rate than those requiring more equity to reflect the greater default risk.
Northern Rock’s move was welcomed by many in the industry, who said it would help first-time buyers enter the market.
Ray Boulger, senior technical manager at John Charcol mortgage brokers, said: “This is good for consumers, some of who will be able to get credit more easily, and it’s good for Northern Rock because it will increase its margins. This, in turn, is good for taxpayers, who own the bank.
“Other lenders will be watching this and I think Northern Rock’s presence in this market will increase the likelihood that more 90% mortgages become available in the next few months. The more lenders in a market, the more it attracts other lenders.”
A rise in the number of lower deposit mortgages should give a welcome boost to a sluggish housing market in which mortgage approvals for house purchases remained close to a two-year low in January with just 28,932 loans approved, according to the British Bankers’ Association.
Other analysts urged Northern Rock to lend cautiously since it was risky lending that got the bank – and the global industry as a whole – into trouble in the first place.
A Northern Rock spokesman stressed that 90% home loans would “only form a very small part of the mortgage book as a whole” and that the lending criteria were strict.
Northern Rock is not the first lender to resume 90% mortgages, which were very popular before the credit crunch but fell off a cliff in 2009 as banks pulled back from most loans of all kinds. In recent months, NatWest, Cheltenham & Gloucester, Halifax, Nationwide and HSBC are among the groups now those offering 90% loans.
However, analysts said Northern Rock’s decision to re-enter the market has attracted particular attention because the public it is especially closely associates it with the dangers of profligate lending. The group was famously lending 125% of the value of some houses before it faced the first run on a major British bank since 1866.
Northern Rock, which was nationalised in February 2008, said its decision to offer higher-margin 90% mortgages was motivated in part by a desire to increase profits – and thus make it more attractive – as it looks to re-enter the private sector.
The bank has appointed Morgan Stanley to “examine the options” for returning it to the private sector, with a sale or flotation viewed as the most likely outcome.
Although the number of 90% mortgage “products” being offered has grown in the past 18 months, it is still well down on the peak seen before the credit crunch.
Some 829 different deals were available in August 2007, falling to 71 in May 2009, according to Moneyfacts. By the start of this year, the number had risen to 199 and by this month it had risen to 214.
The decline of the higher-risk 95% mortgages is even more marked and has yet to rebound. In August 2007, some 986 such home loans were available. This fell to just six in May 2009 and had risen to 25 this month.
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