Northern Rock: Still Lending

And still lending at what seem to be (at least to me) dangerous multiples of income:

Northern Rock stands accused of “reckless” lending after it emerged this weekend that the beleaguered bank is still offering mortgages of six times salary to potential borrowers.

Despite provoking the worst banking crisis for decades, the bank last week offered a reporter posing as a first-time buyer a £180,000 mortgage even though he had a salary of only £30,000.

The loan was at least £30,000 more than other leading lenders were prepared to offer. Repayments for the loan would have accounted for more than 60% of the fictional buyer’s take-home salary.

It is, of course, the taxpayer that is extending that loan. A good use of your money, don\’t you think?

4 comments on “Northern Rock: Still Lending

  1. It seems that all those economists who have been going on about deposit guarantees generating moral hazard have been proved absolutely correct.

  2. Northern Rock is a very low default rate on loans – from memory less than 0.5%. NR problems had nothing to do with who it was lending too but where it was getting the money from.
    The whole point of the Bank of England intervention was so that NR could keep trading. The BoE has just delayed the inevitable but with tax payers money at risk.

  3. The point at issue is the contention of some/many economists that extending deposit protection/insurance creates a moral hazard for the shareholders of deposit-taking institutions, and/or their managing agents, as they come to recognise that there is a prospect of achieving greater rewards by investing the deposits in higher risk assets when the downside consequences of doing so are underwritten by an external party – be it taxpayers or the finance industry at large.

    The report in today’s STimes shows this is just what is happening before our very eyes when the government guarantees with taxpayers’ money all NR’s deposits in order to curb loss of confidence in other financial institutions through contagion and the current £3bn loan from the BoE to sustain Northern Rock is underwritten by British taxpayers.

    With this report, it’s clear now that the writing on the wall for NR has been there for some months if it was the focus of profitable speculation by hedge funds:

    “Hedge funds reaped £1 billion in profits from Northern Rock’s collapsing share price over the past seven months, according to one of London’s most prominent hedge fund managers. . . ”
    http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2508081.ece

    Presumably, professional market watchers were aware of this speculation.

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