A competitor shows interest in Northern Rock’s mortgages

The government’s bodged sale/reorganisation of Northern Rock has a new complication today.

We learn that one mortgage bank is interested in buying the mortgages. Maybe others would be too. The response depends on the price they are prepared to offer, and on whether there will be a successful new owner/lead shareholder or not.

My advice is to say to anyone interested in buying the mortgages that there will be a competition to sell some of them if after a suitable period there is no successful bidder for the whole business. This is a decision which has to be taken by the Northern Rock board, but one which should be influenced by the Bank of England telling them they want some of the taxpayers money back soon.

It would be quite wrong to enter discussions with just one buyer of mortgages, without allowing others to bid. It would be wrong to force the sale of good mortgages at a large discount under the pressure of circumstance. There should be a reserve price which protects the taxpayers’ interest. That is why we need a timetable for repayment which allows this immediate market crisis to pass, and allows some sense to return to the market in second hand mortgages, so the shareholders and taxpayers get proper value for their asset and their security.

At a time when even the Bank of England acknowledges there is insufficient market liquidity, it must be obvious to the authorities they will not get a good price for anything being sold in distressed conditions. First sort out the worst of the credit crunch, by making markets more liquid, and getting banks through their year end book squaring, then see what can be realised to cut the debt mountain at Northern Rock.

Meanwhile the ECB is upping its intervention in markets substantially, as it sees how serious the squeeze has become. The Fed is taking all sorts of action ,trying to repackage off balance sheet debts, cutting interest rates and making cash available. It is still the Bank of England that is doing too little very late, as it still seems to be in denial over how dramatic this year end credit crunch is.

We will not know until the new year whether the banks will feel able to lend a bit more once their year ends are out of the way, or whether their balance sheet stretch is such that current restricted lending is the new norm. Some people say that of course there must be a long period of much restricted lending, as the west has overblown the credit for too long.

Whilst agreeing that money was far too loose, and agreeing that the Basel rules encouraged all sorts of off balance sheet lending that the regulators allowed to happen on too large a scale, I do not agree that we want to live through a long period of little new credit being advanced.

I want to live in a country where young people have a chance of raising a mortgage on their incomes to be able to buy a house. I want new businesses starting up and existing businesses wanting to expand to be able to borrow money to grow and create jobs. It is not evil to lend and to borrow. It is crucial to a successful enterprise ecomnomy, and it is beneficial both to those of us with savings in our pensions or elsewhere to lend, and those in need of borrowings to get started.


  1. Francis Irving
    December 19, 2007

    The problem is that anyone wanting to buy their first house this century has been forced to borrow irresponsibly, because other people are.

    In Q3 2007, median mortgage advance as multiple of salary was 3.39 times. For all of the 1970s, 1980s and 1990s it was between 1.9 and 2.4 times (Council of Mortgage Lenders statistics).

    This looser credit is good while the economy is doing well, and interest rates are low. People can afford the repayments, they’re no higher than the rents they’d be paying anyway. It is a good thing, even though it meant an upwards readjustment in house prices.

    But what happens if something goes wrong? What happens in an economic slump, whatever the cause? There’s no margin for error any more.

  2. Neil Craig
    December 19, 2007

    "I want to live in a country where young people have a chance of raising a mortgage on their incomes to be able to buy a house"

    The ONLY way to do that is by allowing the building of more houses. Everything else is moving around the rules by which we decide who gets them. This only matters if they exist. There is no technical reason why houses need cost remotely what they do. It is all "planning" regulations which prevent builders building &/or require them to use Victorian building practices.

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