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.