Northern Rock crisis: 1st anniversary

Geoff Tresman, Chairman of Punter Southall Financial Management comments on the first anniversary of the Northern Rock crisis: “Throughout the last year since Northern Rock became the first high-profile casualty of the Credit Crunch, Northern Rock customers have been faced with some very difficult decisions.

“Firstly, those who have come out of relatively cheap 2 and 3 year fixed rate mortgages have been offered very unattractive variable rate mortgages which have resulted in many cases, a 30%-40% increase in borrowing costs. Northern Rock's only priority under the new management (the Government) is to reduce the mortgage book and they achieved this by effectively encouraging people to move to other lenders by significantly increasing rates.

“It stands to reason that those people that could move did move and they represented the cream of Northern Rock customers. Those people who weren't so financially secure or couldn't demonstrate earnings or equity, and in many cases both, to satisfy the new hardened criteria laid down by mortgage lenders, found themselves having to stay with Northern Rock and pay very much more for their debt. What Northern Rock has been left with is a far riskier mortgage book with the likely outcome that the rates of repossession will be higher than normal.

“Recent research from Standard & Poors has found that over 350 Northern Rock borrowers face repossession in the 2nd quarter of this year, which is more than twice the number in the previous quarter. The same research showed that one in every 13 UK repossessions in the 2nd quarter were linked to Northern Rock borrowers. Another disturbing finding from the same report showed that a number of Northern Rock borrowers who had outstanding mortgage debt of 90 days or more, grew by two-thirds over the 2nd quarter whilst the rest of the market only recorded a relatively small increase.

“Those people who have got out of Northern Rock already can count their blessings but those who have yet to feel the pain of remortgaging after coming out of a fixed rate mortgage should start researching and seeking advice now. The impact of the Nationalisation of Fannie Mae and Freddie Mac in the US will undoubtedly ease matters in the UK mortgage market and over the next 3-12 months we should see at least the start of a recovery. Those people who have effectively been trapped by Northern Rock into maintaining a variable rate mortgage at a very high rate of interest should keep looking at what is available in the market as more attractive deals will become available.

“For savers the situation is different. For those people who had deposit accounts with Northern Rock prior to the Crisis, your cash is now in Gilt-Edged accounts, which the Government guarantee. If I were to advise someone now on where to place the money, Northern Rock would be way down the list. It was badly mismanaged prior to the Crisis last year and now we have the Government in charge which doesn't fill me with a great deal of confidence.

“Finally, is the Northern Rock scandal the last of its type in the UK or is there a possibility of other major lending institutions going broke? My own view is that Northern Rock was a one-off and was bought to its knees when banks effectively stopped lending to each other. They relied on providing cheap mortgage deals on the back of financing in the wholesale banking market and once that funding dried up, it ran into trouble. It was the epitome of the "stack 'em high, sell 'em cheap" philosophy which, whilst working well in a market stall or cash & carry environment, had no place whatsoever in the Financial market. Providing the other financial institutions in the UK have come clean with their own problems and are not hiding anything off balance sheets, then I believe we have seen the last of this particular type of failure.”