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| Rock faces 50% negative equity | Rock faces 50% negative equity |
| (40 minutes later) | |
| Half of Northern Rock's mortgage loans will be in negative equity if house prices fall by 10% this year, figures from the National Audit Office show. | |
| A report on the bank's nationalisation says it continued with high-risk mortgage lending until its eventual nationalisation in February last year. | |
| But the report says public ownership successfully rescued the Northern Rock bank and protected taxpayers' money. | But the report says public ownership successfully rescued the Northern Rock bank and protected taxpayers' money. |
| The Treasury said it would study the report and respond later this month. | |
| "The Treasury successfully met its objective to protect Northern Rock's depositors and stopped the run on the bank," said Tim Burr, head of the NAO. | "The Treasury successfully met its objective to protect Northern Rock's depositors and stopped the run on the bank," said Tim Burr, head of the NAO. |
| "The Treasury could however have conducted a more systematic assessment of the risks it was taking on and more thoroughly tested the bank's initial business plan in public ownership," he added. | "The Treasury could however have conducted a more systematic assessment of the risks it was taking on and more thoroughly tested the bank's initial business plan in public ownership," he added. |
| Nationalisation | Nationalisation |
| Northern Rock, which had grown to become one of the UK's biggest mortgage lenders, had to be bailed out by the Bank of England in September 2007 when its funding from other banks dried up. Why didn't the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place? Edward Leigh MP, chairman of the committee of public accounts class="" href="/1/hi/uk_politics/7954091.stm">Report adds to ammunition | |
| It was subsequently nationalised "temporarily" by the government in February 2008, as the international banking crisis deepened, and no viable private sector bidder came forward. | It was subsequently nationalised "temporarily" by the government in February 2008, as the international banking crisis deepened, and no viable private sector bidder came forward. |
| One of the Rock's main attractions to potential borrowers had been its Together mortgages which consisted of a 95% secured loan topped up with a 30% unsecured loan. | One of the Rock's main attractions to potential borrowers had been its Together mortgages which consisted of a 95% secured loan topped up with a 30% unsecured loan. |
| These were inherently risky as they exposed to the bank to swift losses if house prices fell. | These were inherently risky as they exposed to the bank to swift losses if house prices fell. |
| But even though house prices had started dropping by the autumn of 2007, the NAO report reveals that the Northern Rock continued to sell the controversial home loans, even as it was seeking help from the authorities. | But even though house prices had started dropping by the autumn of 2007, the NAO report reveals that the Northern Rock continued to sell the controversial home loans, even as it was seeking help from the authorities. |
| "While depositors were queuing up outside branches to withdraw their money and the Treasury was pouring public money in to stabilize the Rock, the bank was still ploughing on with awarding mortgages of up to 125% of a property's value," said Edward Leigh MP, Conservative chairman of the committee of public accounts. | "While depositors were queuing up outside branches to withdraw their money and the Treasury was pouring public money in to stabilize the Rock, the bank was still ploughing on with awarding mortgages of up to 125% of a property's value," said Edward Leigh MP, Conservative chairman of the committee of public accounts. |
| "Why didn't the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place?" he asked. | "Why didn't the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place?" he asked. |
| More risky lending | More risky lending |
| A further £1.8bn worth of the Together loans were issued to Northern Rock borrowers between September 2007 and February 2008. ROCK MORTGAGE BREAK-DOWN 33% borrowed more than 100% of house value10% borrowed 95%-100% of house value7% borrowed 90-95% of house value Source: Northern Rock annual report | A further £1.8bn worth of the Together loans were issued to Northern Rock borrowers between September 2007 and February 2008. ROCK MORTGAGE BREAK-DOWN 33% borrowed more than 100% of house value10% borrowed 95%-100% of house value7% borrowed 90-95% of house value Source: Northern Rock annual report |
| In absolute terms this was less than before, but still amounted to 30% of all its mortgage lending at the time, compared to the 26% which the Together deals had accounted for in the preceding eight months. | In absolute terms this was less than before, but still amounted to 30% of all its mortgage lending at the time, compared to the 26% which the Together deals had accounted for in the preceding eight months. |
| The bank explained that about £1bn of this extra lending had in fact been agreed before September 2007. | The bank explained that about £1bn of this extra lending had in fact been agreed before September 2007. |
| Though generally approving of the government's actions in rescuing the bank, the NAO criticises the Treasury for not checking out the bank's finances with sufficient thoroughness before it decided to nationalise. | Though generally approving of the government's actions in rescuing the bank, the NAO criticises the Treasury for not checking out the bank's finances with sufficient thoroughness before it decided to nationalise. |
| "In the lead up to public ownership, the Treasury did not commission its own due diligence on the company's operations, for example, on the quality of the loan book," the NAO said. | "In the lead up to public ownership, the Treasury did not commission its own due diligence on the company's operations, for example, on the quality of the loan book," the NAO said. |
| The NAO report reveals that greater scrutiny would have uncovered a much higher level of mortgage arrears than the Rock had previously been admitting. The Treasury did not commission its own due diligence on the company's operations, for example, on the quality of the loan book NAO | The NAO report reveals that greater scrutiny would have uncovered a much higher level of mortgage arrears than the Rock had previously been admitting. The Treasury did not commission its own due diligence on the company's operations, for example, on the quality of the loan book NAO |
| One knock-on effect of its high-risk lending was a rapid increase in the bank's exposure to actual and potential losses. | One knock-on effect of its high-risk lending was a rapid increase in the bank's exposure to actual and potential losses. |
| Falling house prices throughout last year meant that by the end of December 2008, 33% of all Rock mortgages had fallen into negative equity - up from just 0.5% a year earlier. | Falling house prices throughout last year meant that by the end of December 2008, 33% of all Rock mortgages had fallen into negative equity - up from just 0.5% a year earlier. |
| Along with growing arrears among borrowers, this meant the bank needed a much higher financial cushion, so the Treasury had to give it a further £3bn in July 2008. | Along with growing arrears among borrowers, this meant the bank needed a much higher financial cushion, so the Treasury had to give it a further £3bn in July 2008. |
| A Treasury spokesman said the department would study the report and reply to the Commons public accounts committee at the end of this month. | |
| "We note that overall the report finds that the Treasury was right to take the decisions it did to protect the interests of taxpayers and to promote stability in the financial system," he said. | "We note that overall the report finds that the Treasury was right to take the decisions it did to protect the interests of taxpayers and to promote stability in the financial system," he said. |
| Many commentators expect house prices to fall by at least another 10% this year, and quite probably by more. | Many commentators expect house prices to fall by at least another 10% this year, and quite probably by more. |
| Mainly as a result of its arrears, and losses on selling repossessed homes, Northern Rock recently announced a loss of £1.4bn for 2008. | Mainly as a result of its arrears, and losses on selling repossessed homes, Northern Rock recently announced a loss of £1.4bn for 2008. |