Back in February, when Northern Rock was nationalised, we were told that the £27bn loan from the Bank of England was secured against good-quality assets and the sum would be repaid by 2010. Now “holes are appearing in both boasts”, said Nils Pratley in The Guardian. This week we learned that £3.4bn of the Rock’s debt would be converted into equity in order to shore up its balance sheet. This increases the overall risk to taxpayers, as this sum will be recouped only if it is possible to sell Northern Rock at a decent price – and in the meantime the state will be a shareholder in a troubled mortgage lender “during what looks set to be the severest downturn in the housing market in decades”, as Capital Economics noted.
Northern Rock is struggling…
Indeed, “the new equity is all too likely to be eaten up by losses”, said Jeffrey Goldfarb on Breakingviews. “Business is terrible.” The capital-raising was prompted by a first-half loss of £585m as bad debts jumped. The number of mortgage borrowers over three months in arrears has risen from 0.6% of outstanding loans at the end of 2007 to around 1% and repossessions increased by 67% in six months. A full 70% of repossessions related to its risky 125% ‘Together’ mortgages, which comprise a full quarter of the overall loan book.
And there’s plenty more where that came from, said David Wighton in The Times. As the Rock shrinks its loan book by encouraging borrowers coming to the end of fixed terms to refinance elsewhere – a strategy that has enabled it to cut its debt to the Bank of England by £9.4bn – it will be left with “a greater proportion of toxic assets”, since risky borrowers will have trouble refinancing. The odds on “a substantial bill” for taxpayers when the final reckoning is made are shortening.
…as housing and economy worsen
The overall state of the housing market certainly offers little cheer. Repossessions jumped by 41% year-on-year in the first quarter, according to the FSA. With arrears rising, consumers being squeezed by rising energy and food bills, and the economy worsening, a “substantial” rise in repossessions is on the cards, said Capital Economics. Forced sales will put further downward pressure on house prices. While housing is tanking (9% off the October peak now, according to Nationwide), consumer confidence has fallen to a record low and the labour market keeps deteriorating, with a KPMG survey showing permanent placements sliding at the fastest rate since late 2001. Oh, and both the services and manufacturing sectors are shrinking. As Michael Saunders of Citigroup said, Britain is now “probably slipping into recession”.