Unless someone was personally affected by the events surrounding Northern Rock, they might have little sympathy for its investors and shareholders. After all, from what has been reported nationwide the affairs of the company were it would seem, hardly handled well. The company was widely criticised for its lending and borrowing policies, and development of products that provided 125% mortgages certainly raised an eyebrow or two. Accusations of greed and unacceptable risk taking fanned the flames of anti Northern Rock rhetoric.
But in the wider context of the mortgage-lending arena, was Northern Rock so really out of step? Did the reality match a widely held perception that Northern rock possibly got what it deserved?
A closer look at Northern Rock shows things might not have been what had been portrayed. For example, the company was not alone in offering mortgages that exceeded property values. In fact 125% is quite misleading. Northern Rock’s widely publicised ‘Together Mortgage’ capped the maximum unsecured amount above the secured 95% to £30,000 which meant that on a house price of say £170,000 the maximum percentage loan would have been 113%, or to put it in monetary terms, £191,500. Other lenders, whilst limiting lending to 120%, appear to have been far more generous in handing out such mortgages whatever the value of the property, or again in monetary terms a mortgage of £204,000 on our £170,000 property.
There are those who suggest that Northern Rock’s lending policies were cavalier and irresponsible. The decision making process at Northern Rock which determined who could and who couldn’t borrow on the ‘Together Mortgage’ carried much tighter controls and checks than some lenders providing similar products. Perhaps Northern Rock’s lending policies should have been more fairly described as selective and cautious.
Would it also be reasonable to consider the risk element lower for the borrower on Northern Rock’s ‘Together Mortgage’ when compared to similar offerings from its peers? Take account that the secured element of the borrowing is restricted to 95% on the ‘Together’ product and it would be reasonable to assume the risk is lower compared to the whole amount being secured with other lenders.
We can see the results of Northern Rock’s ‘risky’ lending strategy published in its 2007 accounts, which clearly shows its mortgages in arrears measured against the Residential Average published by the Council of Mortgage Lenders. A direct comparison sees Northern Rock’s mortgage accounts in arrears at almost half of the national average, with the ‘Together’ product arrears at similar levels to the national average.
Turning to more esoteric matters, the FSA had apparently rubber stamped Northern Rock’s credentials in terms of its Basel II Capital Adequacy requirement only months before Northern Rock’s approach to the Bank of England for liquidity support. During that period lenders across the board were coming to realise that borrowing climate was becoming much more difficult as funding from the wholesale money markets dried up. Given this was an issue facing all lenders was it not to Northern Rock’s credit that they recognised the problem and proactively sought to resolve it with support from the Bank?
Would it therefore be more realistic and accurate to consider that the failings are not necessarily with the company itself and that perhaps questions should be asked of those who monitored its activities and of those who were asked to provide banking support? Should the accusation levied at the company actually be levied at the Tripartite Authorities?
It’s very easy to see Northern Rock as a corporate failure with investment institutions paying the price. But the Northern Rock saga is about ordinary people – homeowners, investors in pensions and endowments, small savers and of course staff employed by the company. Whilst we all feel the effects from the Northern Rock fallout, is it not time for sound reflection on previous and current events surrounding Northern Rock in the hope of finding a path that gives the real victims a better deal?
Chris Hulme is a Director of a mortgage broker practice based in south
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