Northern Rock saga continues as housing crisis blocks bid progress

07 January 2008 / by Verity G
Britain's housing crisis is preventing the sale of beleaguered bank Northern Rock after reports that investment banks Citigroup, Deutsche Bank and Royal Bank of Scotland are growing hesitant about whether to secure loans against the ailing mortgage lender's assets.

While the trio of banks have already agreed to finance the deal by loaning Northern Rock's buyer £10-15billion, they have now indicated that they want to raise the interest rates, which could make the deal too expensive for bidders Olivant and Virgin Group, in turn forcing the stricken bank to be nationalised.

Although the majority of Northern Rock's mortgages are in good shape, the Treasury is insisting the collateral includes the entire book, which includes low quality mortgages. This is creating discomfort for the banks which are now re-evaluating Northern Rock's assets to reflect the forecast for the 2008 property market which is expected to see a rise in arrears and repossessions.

In addition, the number of mortgage borrowers coming off their cheap fixed rate mortgage deals is on the up and the prospect of defaulted payments as homeowners struggle to pay increase mortgage repayments is looking more than just a distant threat. However, according to a report in the Daily Mail, a source close to the bid proceedings insisted the banks are simply bluffing; a tactic that is "normal in the final stages of funding negotiations."

Figures from Nationwide have also revealed the extent of the knock-on effect caused by the Northern Rock crisis after house prices reported a slump from growth of 0.7 per cent month-on-month to a 0.8 per cent drop in November and 0.5 per cent dip in December 2007.

And, despite the International Monetary Fund warning of an impending "sizeable impact" on property prices just last month, Northern Rock still accounts for one in five of all mortgages sold, even with its paltry 7.6 per cent of the market.

More than ten per cent of the 87,393 residential mortgages on Northern Rock's books are now considered to be "higher risk". Likewise, its 6,181buy-to-let mortgages saw 1,455 sold in the first half of last year while a further 3,300 mortgages were sold with a loan-to-value ratio of more than 90 per cent for the same period. As for loans, Northern Rock has £7.83 billion of unsecured loans on its books.

Goldman Sachs, the self-appointed Government advisors on Northern Rock related issues, is now examining the market for alternative backers in the event that the funding is withdrawn.

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