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Rock faces 50% negative equity Watchdog criticises Rock response
(about 3 hours 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. Northern Rock was allowed to lend £800m in risky mortgages for six months after it was propped up with taxpayers' cash, the National Audit Office has said.
A report on the bank's nationalisation says it continued with high-risk mortgage lending until its eventual nationalisation in February last year. The public spending watchdog's report on the Treasury's handling of the crisis found the bank was still giving mortgages of up to 125% in early 2008.
But the report says public ownership successfully rescued the Northern Rock bank and protected taxpayers' money. It said ministers were slow to respond and were under-prepared for the crisis.
The Treasury said it would study the report and respond later this month. However, the report concluded that nationalising the bank was the best route to protect taxpayers' interests.
"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 The Treasury said it would study the report and respond to MPs later this month.
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 'Immediate stop'
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. The NAO found Northern Rock continued to offer its Together mortgage - lending borrowers up to 125% of the value of their properties - from the time of its emergency support from the Bank of England in September 2007 until it was on the brink of public ownership in February 2008. 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
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. Edward Leigh MP, Conservative chairman of the public accounts committee, which oversees the NAO, said: "While depositors were queuing up outside branches to withdraw their money and the Treasury was pouring public money in to stabilise the Rock, the bank was still ploughing on with awarding mortgages of up to 125% of a property's value.
These were inherently risky as they exposed to the bank to swift losses if house prices fell. "Why didn't the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place?"
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. The bank awarded a total of £1.8bn in Together loans, which exposed the bank to swift losses if house prices fell, between September 2007 and February 2008.
"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. This amounted to 30% of all its mortgage lending at the time although the bank said £1bn of this extra lending had been agreed before September 2007.
"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. 'Potential shortcomings'
More risky lending Though generally approving of the government's actions in rescuing the bank, the NAO criticises the Treasury for not having checked out the bank's finances with sufficient thoroughness before it decided to nationalise.
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.
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.
"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 greater scrutiny would have uncovered a much higher level of mortgage arrears than the Rock had previously been admitting. 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
The report is also critical of the lack of preparation by the Treasury. It said the Treasury had been aware of "potential shortcomings" in dealing with a failing bank as early as 2004.
However, it was "not judged by the Treasury to be a priority in a benign economic environment", the report says
Shadow chief secretary to the Treasury Phillip Hammond said the NAO report was a "hard-hitting indictment" of the government's management of Northern Rock's nationalisation.
"Despite dithering for months over the future of the bank, it now emerges there were major due diligence failures at the Treasury both before and after nationalisation - which have resulted in the bill for taxpayers being even bigger than was previously thought," he said.
A Treasury spokesman said the department would study the report and reply to the public accounts committee at the end of the 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.
Negative equity
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.
It was subsequently nationalised "temporarily" by the government, as the international banking crisis deepened, and no viable private sector bidder came forward.
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.
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.
Figures from the NAO show half of Northern Rock's mortgage loans will be in negative equity if that happens.
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.