Northern Rock, the publicly owned bank and mortgage provider, has recently declared losses of around £0.75 billion for the first 6 months of the year. This bank is now 100% owned by the state and these reported losses are a blow to anyone who needs an early return of the bank to private ownership.
Taking a closer look at how the loss occurs suggests a strategy which may provide good medium to long term value for the bank as well as a much needed increase in mortgage offers which will assist the housing market and construction industry.
Firstly, it should be stated that the loss results in part from a shedding by the Rock of a great deal of its’ lucrative mortgage book during the period of public ownership. Essentially, borrowers were encouraged to place their mortgage business elsewhere in an attempt by the Rock to free up cash in order to pay off the government rescue money, made available to the bank at the end of 2007. This has been a successful policy in that it has enabled the debt to be reduced to a current level of just £11 billion from a peak in excess of £30 billion. However the issue is that, because the only Rock borrowers able to move away are the best ones, this has left the business with a higher amount of toxic debt. Much of this toxic lending is 125% mortgage arrangements which will take a considerable time to eliminate and will store up other potential losses in the future.
Secondly, reduced lending levels have lowered underlying profit. This is particularly annoying at a time when sensible mortgage lending is relatively profitable, interest rate margins being particularly high at the moment.
So the government may be forced into a longer term policy for the bank in which an attempt is made to increase lending to, or even further than, earlier levels. If such lending is done prudently then a solid base of prudent and profitable mortgage lending will help to protect against future losses and will also add real value to the bank to certify that the state gets most value from any future return to public ownership.
As long as that the government make the right decisions now, a rebuilding of the bank as a chief mortgage provider could be good news for the housing market as well. Lower mortgage lending is now thought to be the largest inhibitor to a sustained property market improvement, so some new mortgage products would certainly not go amiss. Owners looking to Sell Property Fast will hope the government adopt this policy and the Quick Home Sale may become an element of property transactions in the very near future, but for the moment, I’m just very thankful that I’m not in the dreadful position of having to Sell my House fast in the current situation.
