They're doing What? Again?

02/28/2011 5:50 pm EST


Jim Jubak

Founder and Editor,

How quickly they forget.

Northern Rock, the first British bank to be taken over by the British government at taxpayer expense during the global mortgage crisis, is back in the 10% down mortgage business.

And regulators are cheering the bank on because the bank need to show more revenue as it gets ready to sell shares to the public again.

Northern Rock ran into trouble in 2007 as the mortgages it had made to riskier borrowers went south with the British real estate market. A big part of the problem was that the bank’s most aggressive products didn’t leave borrowers any room for error if the price of their house dropped or the economy went into recession. Northern Rock’s most famous product was the “Together” mortgage that let borrowers take out a mortgage or up to 125% of the value of the house they were financing.

In February 2008 the government essentially nationalized the bank in order to protect depositors and stabilize the financial markets. Loans to the bank came to 25 billion pounds (and the pound was worth something then.) Guarantees added an additional 30 billion.

Since then a chastened Northern Rock has required borrowers to put down 15% to get a mortgage. But that’s about to change. Government regulators have approved allowing the bank to lend out more of its reserves. One of the first effects of that approval will be to allow the bank to issue new mortgages with just 10% down. The required high reserve levels make it hard for the bank to compete and keep the bank’s comparative return on capital below that of other banks.

Northern Rock needs the boost to profits and return ratios because it wants to sell stock to the public in order to begin to pay back the government and end its roll as a ward of the state. The bank has hired Morgan Stanley to advise it on options that include a partial sale in the public markets or an acquisition by another bank.

The bank lost $226 million in the first half of 2010.
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