Could Northern Rock go from sinner to saint

As a result of an announcement earlier today, Northern Rock may bizarrely go from sinner to saint and become the saviour of the UK mortgage market. Having previously resolved to clear off its mortgage book and repay the government loan of £27bn, the announcement of £14bn new lending by the end of next year represents a complete turn around, and one which has been welcomed by the industry at large. The change of direction is thought to be good news for both new customers and those who are already with Northern Rock

Whilst the fine details still have to be worked out, it is thought that permission has been received from the Treasury to increase lending by some £5bn this year with a further £9bn increase next year. As part of the change of emphasis, it is said that the Treasury have given Northern Rock the green light to lend up to 90% of the value of a property. It is hoped that when Northern Rock come to set the interest rates for their 90% range, they do so in relation to the level of interest rates generally, and not by reference to the rates being offered by the few lenders who still claim to be in the 90% LTV market. It will do nothing to help the current crisis if Northern Rock were to simply offer yet another high priced five year fixed rate which nobody was able to qualify for. As far as exiting customers are concerned, Northern Rock have confirmed that they will not be so enthusiastically encouraged to go elsewhere, and will be given more choice when they come to the end of their current rate.

The way that Northern Rock funded their lending in the past is not possible or appropriate in the current economic climate, and therefore some restructuring of the business will be necessary to provide the necessary funds for lending. Any restructuring which is proposed has to protect the long term interests of the taxpayer whilst at the same time providing sufficient new finance. It has been reported that part of the new funding will be as a result of an increase in the government loan to Northern Rock, and a reduction in the level of repayment which need to be made under it. Gary Hoffman, chief executive of Northern Rock, says:

"This is a very positive outcome for the Company, the taxpayer and, of course, consumers seeking a mortgage. Since entering public ownership we have concentrated on reducing the balance sheet through a mortgage redemption programme, and have therefore only written a limited amount of new lending.

"I am delighted that we can now return to the mortgage market in a more meaningful way, on a commercial basis. It represents another important step in the ongoing rehabilitation of the Company, returning to financial viability and ultimately returning to the private sector."

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