Troubled high street lender Northern Rock has put up rates on its fixed-rate loans, and consigned to the bin its trackers for borrowers with poor credit history. This move signifies a scaling down of sub-prime mortgage business for the company.
Northern Rock has been the work performing bank stock in the UK this year, having been exposed to turbulent wholesale credit markets, so it has raised its sub-prime fixed-rate mortgages for would-be borrowers by up to 1.5%.
Last Thursday the bank’s shares regained some ground, closing at 757p. This was following the Bank of America’s move to buy shares in US lender Countrywide Financial for $2bn (around £1bn).
Another fillip for Northern Rock came with rumours last Wednesday (23rd) that HSBC might be considering buying it.
The bank is not the first lender to move back from sub-prime lending. Specialist sub-prime lender GMAC-RFC had already raised its rates, and Kensington is likely to take similar action. Edeus and Mortgages Plc, backed by Merrill Lynch, also raised their the rates on their sub-prime mortgages by up to 0.75% a couple of weeks ago.
Northern Rock’s shares had fallen even lower in the previous week when shares slumped to a three-year low after it warned that it faced a potential funding gap as market liquidity evaporated in the worldwide turmoil.
Alex Potter, of Collins Stewart, said that Northern Rock would have to raise sums equivalent to 4.4 times its capitalisation from wholesale money markets to fund its business. However, it had become more costly to use this source of capital. If the ‘irrational’ gyrations in wholesale credit markets continued to wobble then “you are starting to run the risk of profit warnings,†he said.
Spokesman for Northern Rock, Brian Giles, said the bank was well positioned, partly due to ‘pro-active’ fundraising earlier in the year. Still, ‘throttling back’ lending activity would be an option if tough conditions persist.
Now the throttling back has begun.
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