Pressure on Rock 'makes mortgage famine worse'
Dec 17 2008 by William Green, The Journal
MINISTERS have been accused of making a national mortgage famine worse by forcing Northern Rock to shut off new lending.
The Home Builders Federation (HBF) said the Government was exacerbating a severe contraction in availability of mortgages as a result of its policy on Northern Rock. The nationalised bank is required to slash the size of its mortgage book as part of its business plan agreed with the Government, not least to meet European state aid rules – although a review of the strategy is now under way.
In evidence to MPs, the HBF said: “Following nationalisation, Northern Rock has been required rapidly to reduce its mortgage book, thereby sucking funds out of the mortgage market.”
Speaking to the Commons Communities and Local Government Committee, investigating the credit crunch impact on the housing market, the body said nationalised Bradford & Bingley also seemed likely to stop lending and might be required to shrink its mortgage book.
The organisation, which represents most British housebuilders, also said building societies had cut back on lending partly in response to requirements by the Financial Services Authority. The HBF said: “With most specialist lenders closed for new mortgage business, the market is now reliant for net lending growth on the limited number of banks which have not been nationalised.
“The absolute economic priority must be for the Government to intervene to arrest this vicious downturn spiral.
“Because the mortgage famine, which lies at the root of the housing crisis, is being driven primarily by an unprecedented crisis of confidence among banks and investors, it can only be solved by Government intervention.” Newcastle Central MP Jim Cousins welcomed the HBF’s conclusions and stressed Northern Rock’s business plan would have to be “completely recast” as about £12bn had already been sucked out of the mortgage market.
The Labour MP, who sits on the Commons Treasury Committee, said the bank was seen as secure thanks to its nationalised status and so was attracting funds despite being unable to offer the best rates under European competition rules.
He said: “It has got to be allowed to use that money to support the housing market and not just repay the Government.
“It has got to stop squeezing its mortgage book because squeezing the mortgage book puts pressure on its homeowners, forcing them into refinancing deals with other mortgage lenders that are more expensive for them and add to their own economic difficulties. Both the Government and Northern Rock have said the business plan is being reconsidered. It has to be reconsidered fast and if the European Commission stands in the way, the European Commission is going to have to be told to get a grip of itself.”
He said a rethink would benefit homeowners, the wider mortgage market and other lenders currently taking on Northern Rock customers – and save more of the firm’s jobs in the North East.
The developments came after Chancellor Alistair Darling said the Government was continuing to look at how the bank was performing as a review of its business plan continued, while Northern Rock chairman Ron Sandler has admitted there were inconsistencies in how the firm was treated compared with other nationalised financial institutions.
