“The ghost of Northern Rock looks set to haunt the UK authorities a bit longer,” said Jeffrey Goldfarb on Breakingviews. The nationalised bank is supposed to repay the £24bn it borrowed from the Bank of England by 2010. But this week chairman Ron Sandler said that house-price slides of more than 5%, along with a downturn that leads to higher unemployment, would “place considerable strain” on the bank’s ability to deliver the plan.
“His reality check seems to be coming a little late,” as Lucy Farndon said in the Daily Mail. Even the Government is pencilling in a 5%-10% slide in house prices “at best”; some forecasters see a 30% total slump over two years. And the economy seems on track for a nasty slowdown as the weakening housing market dents consumer confidence and spending, and unemployment is on the rise.
A key problem for Northern Rock is that the credit crunch is hampering its plans to accelerate the rate at which borrowers switch to other lenders when deals, such as two-year fixed rates, come up for renewal; this frees up money to make repayments to the Government. With far fewer lenders seeking new business now, the overall riskiness of the loan book is set to rise further as thousands of customers who took out 100%+ mortgages will be stuck at Northern Rock. Meanwhile, the percentage of mortgage borrowers in arrears has jumped from 0.57% to 0.95% over the past four months. The saga looks far from over.