It’s time to face the music for Northern Rock

When the history books are written on what caused the first (and hopefully the last) global financial crisis of the 21st century, what will undoubtedly will be regarded as the “kick off” point in the UK will be the sudden and dramatic collapse of the Northern Rock Building Society. Nobody seemed to really understand the implications of the Bear Stearns Bank and the terminology “sub-prime mortgages” must have meant very little to the average UK citizen, but when the news broke that Northern Rock was in serious financial trouble, and queues began to form around the block to withdraw deposits, then the chilling realization began to form in the minds of many that the golden era of easy finance was over. And that the time had come to pay to the piper.

One of the UK’s biggest mortgage lenders at the height of the property boom, Northern Rock were the first bank to bail out by the Bank of England during the current crisis, as other banks began to refuse them further finance. As the international banking crisis deepened, and no viable private buyer emerged, Northern Rock were eventually nationalised by the government, supposedly on a temporary basis.

A recent report issued by the National Audit Office (NAO) has begun to peel some of the layers of how this long established building society managed to find themselves in such desperate financial straits, and even after they were the Treasury began to inject considerable sums of public money into the bank, Northern Rock, continued to award mortgages that amounted to (at least) 100% of the property’s value in a rapidly declining market. .

According to their findings, the NAO have declared that Northern Rock lent up

£800m to borrowers whose mortgage could be classed as “risky” This meant that the levels of equity in the agreement were less than 30% of the value of the property. The reports goes on to reveal that as late as spring 2008, there were a considerable number of cases recorded where Northern Rock issued mortgages of up to 125% of property values where the prices were continuing to plummet.

This amounted to 30% of its entire mortgage lending at the time although the bank said £1bn of this extra lending had been agreed before September 2007.

Findings of the report also reveal that before the treasury stepped in to rescue Northern Rock in order to protect the public’s savings. The mortgage bank’s lending policy could only be described as “foolhardy.”

Around a third of their clients were holding mortgages that represented more than the property value, with a further almost twenty percent with equities of between 90 -100% and decreasing.

The NAO report, whilst it generally displays its approval of the government’s intervention to protect the bank’s depositors through keeping Northern Rock afloat, does level some criticism on the Treasury for not taking a much closer look at state of the bank’s finances, before it deciding to take the drastic step of totally nationalisation.

The Treasury is to study the report and reply to the public accounts committee at the end of the month.

It might not make for light reading for many with the report stating that the government was not only slow to respond but were totally under-prepared to handle the crisis. Obviously they hadn’t heard of Bear Stearns either!

In the meantime it will not come as a surprise to anyone in recession hardened Britain of 2009, that as a result of mortgage arrears as well as shortfalls on sales of repossessed homes, Northern Rock made a trading loss of £1.4bn in 2008

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Tags: Bailout, Bank, Bank of England, Banking, British Economy, British Pound, Credit Crunch, Financial News, Northern Rock, UK Banks