A blog by Luke Akehurst about politics, elections, and the Labour Party - With subtitles for the Hard of Left. Just for the record: all the views expressed here are entirely personal and do not necessarily represent the positions of any organisations I am a member of.

Monday, September 17, 2007

In praise of Northern Rock

I'm getting heartily fed up with all the sanctimonious commentary about Northern Rock deserving the current crisis on the grounds they lent to people who were high risk.

I've got a Northern Rock mortgage.

I've got it because they were the lender that was prepared to give me a 100% plus deal. I.e. I didn't need a deposit and I was able to borrow a bit more to buy some furniture.

I don't think it's unreasonable that people who don't have a family trust fund to put up a deposit, or who have to buy their own furniture rather than inherit it, should be able to be home-buyers.

There was nothing irresponsible about me taking out that size of loan or about them lending it to me.

They have also been criticised for lending multiples of 5 or more times salary to people. In Hackney a one bedroom flat sells at about £180,000 so unless lenders are prepared to lend at 5x salary then no one with an income under £36k would ever be able to buy.

What is happening to Northern Rock is an outbreak of mass hysteria amongst savers that has nothing to do with the company's business model, which was actually pretty sensible - spotting there were a bunch of people (20% of the market!) who wanted to buy but didn't have a deposit, and helping them get on the housing ladder.

My hunch is that most of the people retrospectively attacking them already own their homes and can deliver pious lectures about "risky lending" without remembering what it's like to be, or to want to be, a first-time buyer.


Anonymous Neil Foster said...

I'd also like to add my support to Northern Rock on a seperate point. They are are very committed to the social and economic regeneration of the North East. I've seen over a number of years Northern Rock's Foundation commit significant amounts of money to the voluntary and community sector across the region.

Added to that a couple of years ago I helped organise a fundraiser in Tyneside following the Tsunami. We raised several thousands of pounds and the Northern Rock Foundation generously matched every penny. How many other banks have such a strong conscience?

10:04 am, September 17, 2007

Anonymous jdc said...

People attacking Northern Rock on that basis are pretty much wrong. Northern Rock act as agents on those stupid mortgages for a non-high street lender. They're unaffected by the default rate, and the default rate on mortgages with Northern Rock are very low.

The people buying the mortgage debt may deserve to be attacked, but attacking Northern Rock is a bit like attacking your credit card company because the toaster you bought with it broke.

The reason Northern Rock do deserve to be attacked is that they have attempted to grow their business far too quickly by selling off all their mortgage debt into money markets. By doing this, they've been able to lend out far more than anyone is saving.

It has been plain for some time to anyone watching what's going on in the world economy, and in particular the US, that the availability of money in these markets was going to be significantly reduced.

So now you have an institution which has become a major lender (something like 1 in 5 of the UK's new mortgages), regularly at the top of the best buy tables, that simply can't fund its lending business any more. There are a few other lenders about to go the same way, and the impact is potentially going to be huge.

For the record, I'm not a homeowner. However on the wider point your statement that In Hackney a one bedroom flat sells at about £180,000 so unless lenders are prepared to lend at 5x salary then no one with an income under £36k would ever be able to buy. doesn't ring true for me. If no lenders were prepared to lend at 5 times salary, there'd be fewer buyers at £180,000 than sellers, and prices would fall to a more affordable level. I suspect that may be about to happen - though it won't be pleasant for people who have recently bought somewhere for 100% plus of the value, nor for banks if they find themselves repossessing properties that are only worth 90% of the outstanding mortgage.

10:53 am, September 17, 2007

Anonymous jdc said...

A bit more on this, actually, because the whole area's got the potential to bite us badly when we are fighting elections on the basis of a strong and stable economy.

I don't have a family trust fund either, but I live on less than I earn, and do my best to save up. When I think prices and interest rates are at a reasonable level, I should have enough for a 10% deposit in London, or a larger one somewhere nicer.

If a 1-bed in Hackney sells for £180,000, then repayments on that mortgage would be around £1000 a month. Given that similar flats rent for £650, saving up a 5% deposit shouldn't take too long - if you're in a position to afford to up your spending by £350 a month, you can save up at least £4200 a year in the meantime.

As for mass hysteria among savers, presumably you think financial markets are a better indicator. If there's no problem with Northern Rock's business model, why can you buy their shares for £3 each when they were £12.50 in Spring?

11:02 am, September 17, 2007

Anonymous Dan said...

jdc is right. Northern Rock's woes are nothing to do with its lending policies and everything to do with the way it has chosen to fund itself.

So far there's no indication there's a problem with its mortgage assets and so, even if the bank fails, the only people to suffer will be its shareholders.

Which is as it should be.

1:27 pm, September 17, 2007

Anonymous Anonymous said...

Luke, you are being too easy on Northern Rock.
First, deposits are necessary for two reasons: 1) they mean a mortgage holder owns at least some of the equity in the house, so that if it drops in price they are in less danger of entering negative equity, and 2) it shows some level of saving ability and maturity in the borrower.
Northern Rock became a sub-prime lender and that business is inherently risky. They also lent out money at very high interest rates and that too was risky.
As for Dan saying that the only people who will suffer will be the shareholders "which is as it should be", well, shareholders are people too you know! Why is that ok? Many pension funds are invested in Northern Rock, meaning almost all of us have money invested directly or indirectly in it.
And lastly, the suggestion that the media have generated this crisis is wrong too. They've only reported the truth: which is that NR's business is in deep, deep trouble.

3:24 pm, September 17, 2007

Anonymous jdc said...

Not necessarily, anonymous. They lent out money at relatively low interest rates, effectively running a carry trade within one currency. That's how they went from nowhere to 20% market share in about three weeks.

Traditional banking, of the kind of which Alistair Darling approves, has a bank acquiring money from its savers, then lending that money at a higher interest rate to its borrowers, and making the money on the difference.

Northern Rock banking has banks going out directly into the money markets to borrow money, lending that money to a borrow, then packaging and selling on the debt so that it can do it all over again.

This works for as long as you, as a bank, are considered more creditworthy than the people to whom you are lending. At the moment, that's not the case, so that business model leaves you trading at a loss, not at a profit. Once you admit to problems, you become even worse than banks-in-general, so once you're out of the game it's almost impossible to get back in.

Northern Rock don't do much traditional sub-prime, they're just a front in that market for Lehman, so the risk doesn't accrue to them.

That doesn't mean other lending is always risk-free - it might have looked smart three years ago to lend someone earning 40k five times their income, but at prevailing interest rates they're paying about 50% of their after-tax income on the mortgage. Risky if they go and do something silly like be between jobs for a few months, or have children.

3:43 pm, September 17, 2007

Anonymous Anonymous said...

I hope you still like Northern Rock and their 100% (or 125%) mortgages if house prices fall and you find that your debt cannot be covered if you have to sell.

You'll be all right if you can hang on five to ten years, keeping up the mortgage payments, not getting sick or being made redundant......

I know how it feels when nobody will give you a loan, I also know how it feels when you've sold your house because you couldn't afford the payments....and you still have to go on making the payments.

Good luck!

7:12 pm, September 17, 2007

Blogger el Tom said...

"What is happening to Northern Rock is an outbreak of mass hysteria amongst savers that has nothing to do with the company's business model, which was actually pretty sensible - spotting there were a bunch of people (20% of the market!) who wanted to buy but didn't have a deposit, and helping them get on the housing ladder."

Here here. These people are acting selfishly and irrationally. Though of course they have a right to do so. Gits.

7:59 pm, September 17, 2007

Anonymous Ted Harvey said...

Well these people are, for example, all hysterical... or 'gits'... so why don't we just abolish all regulation and all statutory oversight and leave things to the market where the interplay between private lending companies and free individual borrowers determines and self-regulates everthing?

In fact, given this whole thread, why don't we all just join the Tory Party and make common bond with the likes of Redwood on the right of the Party with an total belief in free markets, the indisputable right of free choice and the benevolence of trade? Who care about those hysterical gits eh?

I'm honestly gobsmacked.

8:18 pm, September 17, 2007

Anonymous Dan said...

Anonymous, we're getting into very dangerous territory if Government protects shareholders from the consequences of their bad decisions.

Sadly, I think this is what Gordon Brown has just done. In the short term it will boost public and City confidence, but in the long term it does no good at all if businesses think they can behave recklessly and Government will bail them out.

This is socialism for the rich, George Bush style, and those of us on the Left should have none of it.

It's not really about protecting pension funds - they and other institutions were driving the early selling, and it would be surprising if many pension funds were still holding Northern Rock shares yesterday.

3:51 pm, September 18, 2007

Blogger Man in a Shed said...

Northern Rock had a business model that had an underlying risk, and they lost out on the turn of the cards.

As for the savers withdrawing their money - that was by far the most rational thing for an individual to do. Especially for those people who could never replace those losses.

If people with their life savings in Northern Rock want to criticise them - then all well and good. Others should take all their savings and pay them into Northern Rock - then they can criticise.

How many of the pro-Northern Rock people have made large deposits over the last week ? That's the only support that adds up to anything other than hypocrisy.

For those with a mortgage - you're fine. In many ways the Northern Rock is banking with you - as long as you make the payments. The worse case you'll have your mortgage sold on to another company (most likely the tax payer). No real reason to worry as you can remortage if you don't like them (isn't freedom great ?)

7:02 pm, September 19, 2007

Blogger Kris said...

"My hunch is that most of the people retrospectively attacking them already own their homes and can deliver pious lectures about "risky lending" without remembering what it's like to be, or to want to be, a first-time buyer".

Ha,ha,ha! Sorry, but I don't own my own home, prices are too inflated and I'm not dumb enough to expose myself to the risk of losing it all with a 6xs salary 110% mortgage.

You speak of the Northern Rock like they are a benevolent government quango.

I'm remined of the election mantra of not that long ago where Gordon accused the Tories of being "boom and bust". Stand by for heavy seas, the government isn't going to be able to indemnify all mortgagees on a pound for pound basis indefinitely.

10:21 pm, September 19, 2007

Blogger Mike Livingstone said...

I'd also add my support to Northern Rock. The crisis has nothing to do with lending practices and in fact I would say Northern Rock is on relatively high moral ground in this regard. The main problem is due to a temporary, but highly problematic shift in the LIBOR interest rate. Fortunately this is now coming down and so I believe NR will eventually recover.

The site of short investors and vulture funds trying to talk down the bank is rather ungratifying and is totally predicated on their desire to either buy up assets at below value or potentially eliminate a competitor.

Personally I believe larger banks like Barclays and HSBC don't do the public any favours as they have too many conflicts of interest. Really they are the ones that should be broken up by the MMC.

PS - Is someone going to start a Downing Street epetition to prevent the government from seizing Northern Rock.

12:42 pm, September 25, 2007


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