Northern Rock starts back into mortgage-backed securities business

Story in today's Newcatle Journal

NORTHERN Rock plc is planning the first issue of bonds backed by its own mortgages since it collapsed in 2007.




The Newcastle-based bank has said it will package together some of its “high quality“ home loans to offload as part of the mortgage securitisation as it increases the amount of money it can lend.



The move is a further sign that the taxpayer-owned company is returning to the way most banks operate to prepare itself for a sale into the private sector.



A Northern Rock spokesman said: “This transaction demonstrates another positive step in Northern Rock’s journey.



“Northern Rock will remain a primarily retail funded bank, with this transaction representing only 2% of our balance sheet. It will provide diversification into a cost-effective form of funding in the best interests of taxpayers.”



The creation of the asset-backed securities will amount to around 2% of Northern Rock’s balance sheet on December 31 last year.



“This transaction will diversify both the source and term of the company’s funding base, and will be offered to investors in sterling and euros,” said the bank.



“This will be a standalone transaction, secured on high quality UK mortgage assets, selected from the company’s total loan book of £12.2bn.”



The Rock’s new lending has been funded by retail savings since its bail-out in the credit crisis. But the securitisation will raise up to £400m and considerably increase the amount it has available to lend.



The bank is confident the proposition will prove attractive to investors because of the high quality of its mortgage book, which has a loan to value average of 59%, with arrears also running at a low rate of 0.17%.



When the business split into the ‘good’ Northern Rock plc and the ‘bad’ bank, Northern Rock Asset Management (NRAM), at the start of 2010, its historical securitisation funding went with NRAM.



Around 35% to 40% of the company was funded this way before the Rock’s collapse and securitisation represented a higher share of the newer funding.



Securitisation was blamed for contributing to the credit crunch but it has since emerged that many of these mortgage-backed securities were based on risky loans, taken out at the height of the borrowing boom.



Mortgage-backed securities allow banks to bundle loans into instruments that are sold in the markets, freeing up their balance sheets and providing them with room to offer more loans.



They were largely blamed for causing the credit squeeze that brought banks such as Northern Rock to their knees.



It has emerged since the crunch that many mortgage-backed securities were based on risky loans, taken out at the height of the borrowing boom.



The Rock’s return to the securitisation market follows other banks, including part-nationalised Royal Bank of Scotland and Lloyds Banking Group, which have gone back to mortgage-backed funding markets. It suggests things may be set to improve for borrowers who are still struggling to access affordable lending.



Northern Rock will be running roadshows over the next few weeks for institutional investors interested in the securitisation.



The Rock appointed Deutsche Bank earlier this month to advise on its sale back to the private sector, just days after posting an annual loss of £232.4m. But Rock executive chairman Ron Sandler has put no timetable on a sale.

Campaign for remutualisation of the Rock gathers support

"The Government has made clear its support for mutuals and  diversifying the financial services sector in the Coalition agreement. (See text in previous post)

"We are calling for ministers to honour this commitment and ensure a feasibility study is carried out into remutualising Northern Rock.

"A mutual future for Northern Rock has many advantages, which include encouraging a more responsible attitude to risk in financial services, promoting competition and choice, increasing the power of consumers and rooting financial institutions in the communities they serve.

"If we are serious about changing the way the sector operates and its attitude, what better way to start than by remutualising Northern Rock plc and giving life to the mutual sector?"

- Chuka Umunna MP

"Whilst Northern Rock plc has recently reported disappointing financial results, its future as a mutaul could potentially be much brighter."

- Catherine McKinnel MP

Building Societies Association urged remutualisation of Northern Rock

In its Budget submission to the Chancellor of the Exchequer the BSA said

The BSA welcomes the commitment by the Coalition Government to foster diversity, promote mutuals and create a more competitive banking industry. A financial system with diverse ownership and governance structures is better able to weather the strains of the business cycle than one which is plc-dominated. Mutuals can counter-balance the short-termist pressure of the City. Mutuals also help reduce the concentration of financial sector resources and employment in the City, dispersing wealth and welfare to regional and local economies.

Keeping a reformed Northern Rock independent of the big banks would be good for competition.  A remutualised Northern Rock would help the Government to meet its policy objective of supporting competition and diversity through the maintenance of a strong mutually-owned financial sector. In any exit process the Government needs to achieve optimum value for the taxpayer.  A re-launched and remutualised Northern Rock can repay the taxpayer stake over time. A deferred payment profile can give the optimum outcome, both returning the full value to the taxpayer and achieving other public policy goals, such as increased stability and competition.

More than 50 MPs have called for the remutualisation of Northern Rock

REMUTUALISATION OF NORTHERN ROCK - EDM 1351

• Session: 2010-11
• Date tabled: 26.01.2011
• Primary sponsor: Umunna, Chuka
• Sponsors:
  • Campbell, Menzies
  • Cruddas, Jon
  • Evans, Jonathan
  • Lucas, Caroline
  • McKinnell, Catherine

That this House notes that the three year anniversary of the nationalisation of Northern Rock falls in February 2011; recognises the need for competition and choice in the financial services sector; welcomes the Government's commitment, articulated in the May 2010 Coalition Agreement, to bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry; believes that a thriving mutual sector adds to the diversity and strength of the UK's financial system; applauds the democratic structure of financial mutuals which make them accountable to their customers, as well as their strong record for customer satisfaction and links with the communities they serve; further recognises that financial mutuals' traditional business model involves less risky financial activity than other firms in the sector; is concerned by the consolidation in the UK financial services sector following the financial crash of 2008; further notes that the Government has yet to outline its position on the future of Northern Rock and that UK Financial Investments (UKFI) has issued an invitation for expressions of interest from corporate finance advisers to work with both UKFI and Northern Rock in the evaluation of the strategic options for the company; and calls on the Government to give equal and due consideration to a mutual option for the future for Northern Rock by requiring UKFI to undertake a feasibility study and seek advice into remutualising Northern Rock plc.

Coalition Government agreement on banking and business

The actual text of the agreement on banking and business can be found at http://busmatters.blogspot.com with a link through to the whole text of the agreement.

Northern Rock hires Deutsche Bank for sale

This has appeared in the papers.

Robin Ashby spoke on Radio Newcastle this week about
- the latest results
- bonuses for staff
- advisers

The loss doesn't necessarily mean anything. There could be more "clearing of the decks" - financial engineering so that downgrades can be written down, which new owners could write back in to make a profit. Or to create more tax losses and reduce tax on future profits. It's interesting that NR is considering buying assets which are supposed to be "bad" back from the "Bad bank"  - Northern Rock Asset Management. They weren't so bad after all? Which is what we've been saying for a long time. The proposal to restart 90% mortgages would help first time buyers who have great difficulty with the large deposits lenders are currently demanding of them.

We have no problem with bonuses for counter staff and junior levels. This money would most likely feed straight back into the local economy, as it will be spent mostly in the region. We have  a lot more problem with multi million pound bonuses for people at the top of the tree.

Why is more high priced help being brought in? A fortune is already being spent on consultants. Any buyer will want to check the books. The newspapers will tell you who could be interested in buying Northern Rock. A quick email to Branson and others who've already put their heads up is all that's needed. There's too much incestuous feeding of City slickers already, we can't see why this is necessary.

Your comments welcome as always!

Northern Rock results due out this week

Forecasts are that losses of around £230 million will be announced ; a cost-cutting programme inc back off services as a prelude to a sell off; perhaps the gloves will come off as they step up efforts to gain new customers (90% mortgages were re-introduced recently) ; and the appointment of Morgan Stanley (no doubt for sky high fees) to oversee privatisation of the bank that was taken from us.