Housing fall may hit Rock
Jan 7 2008 by Paul James, The Journal
FEARS of a house price crash are threatening to derail the possible sale of crisis-hit bank Northern Rock, city sources claimed yesterday.
The rescue of the bank by one of its potential suitors is dependent on the bidders being able to secure funding of £10bn to £15bn from investment banks such as Citigroup, Deutsche Bank and Royal Bank of Scotland.
But these groups are said to be increasingly reluctant to secure their loans against Northern Rock’s mortgage assets in the face of falling house prices.
It was reported yesterday that although the bulk of Northern Rock’s mortgages are good quality, the Treasury is insisting banks take a “slice” of its entire mortgage book as collateral, and this would include some lower-quality loans.
As a result, banks are having to re-value Northern Rock’s assets to reflect the fact that house prices could fall and mortgage arrears are expected to rise.
Banking sources close to proceedings said the deterioration in the housing market had made it harder to value bits of the mortgage book.
One banker said: “The deterioration in the housing market does make it harder.
“There has been a significant worsening in the outlook for UK housing since September.”
Another insider said that getting the banks behind a deal was proving “tricky, because it’s very hard to value the bits of the book that are not so good. Valuations are sliding and they keep having to revalue it.”
Since the problems at Northern Rock first emerged in September, the long-awaited slowdown in the housing market has materialised, with most indexes now reporting falls in property prices on a monthly basis.
At the same time, the Council of Mortgage Lenders has predicted that the number of people falling behind with their mortgage will soar by 50% during 2008 to 45,000 – a level not seen since the 1990s house price crash.
Some reports claim around 10% of the mortgages on Northern Rock’s book are now thought to be of higher risk.
A consortium led by Sir Richard Branson’s Virgin and the Olivant investment group are both vying to take control of Northern Rock. It is thought unlikely that either group will have a proposal in place by Tuesday next week when there will be an extraordinary general meeting.
One of Northern Rock’s biggest investors, hedge fund RAB Capital, has written to shareholders urging them to back resolutions tabled by itself and SRM Global at the EGM.
The pair are keen to maintain their rights amid concerns that political pressures could lead to a deal being done without shareholders being properly considered.
No one from the bank could be contacted for comment.
