Shrinking bank

[Legal Beagles]

Northern Rock's plans to get rid of many borrowers

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[calamity jane]

Re: Shrinking bank



The business plan put forward by the new management of the Northern Rock amounts to one of the most extraordinary examples of "down sizing" yet seen at a UK bank.


The bank, until last year the country's most aggressive mortgage lender, now wants to get rid of 60% of its mortgage customers in the next couple of years.


The money that is redeemed will be used to repay all the government's emergency lending by the end of 2010.


The Rock, now owned by the government after its recent nationalisation, currently has about £24bn of state money on its books and hopes to have just £1bn left by the end of 2009.


It has £25bn to £30bn of mortgage deals coming to an end this year alone, typically short-term fixed-rate deals.


The bank hopes most of these customers, and others in subsequent years, will simply go elsewhere to renew their home loans.


"By... encouraging and helping existing customers to transfer their mortgages to other lenders shortly after the customer's fixed or discounted period expires, redemption levels of some 60% can be achieved," said the bank.



Expertise?



It has already been contacting customers by letter and phone, advising those within a few months of their deals expiring that they will probably be better off borrowing money at better rates elsewhere.



Extraordinarily, the Northern Rock may now try to sell mortgage deals for other banks and building societies to encourage its own customers to leave.


"The company will also explore arrangements to provide mortgages directly to some customers on behalf of other lenders," it said.


"This would enable Northern Rock to improve its service to customers and help achieve the desired level of redemptions," it added.


Ray Boulger of the mortgage broker John Charcol said the bank might face some problems.


"They haven't got the expertise, and some lenders might not be keen to deal with them anyway knowing it's a short-term situation," he said.



Stuck

This does not mean that there will be no new mortgage lending at all

The bank hopes to keep offering £5bn of new mortgage money each year, which will probably amount to 40,000 to 50,000 new deals.


Details are not clear yet, but comments from the bank's new executive chairman Ron Sandler suggested that this money will be targeted at people with large deposits to put down, "high credit quality customers" as the business plan puts it.


Not everyone with a Northern Rock mortgage will be able to move, even if they want to.


With other lenders becoming much more choosy about to whom they lend, and on what terms, some Northern Rock mortgage holders may find that when their current deal expires they do not have a sufficiently large deposit to put down elsewhere.


If they have to stay put then they will automatically start paying at the Rock's current standard variable rate, which is 7.59%.


That in turn would mean a big jump in monthly repayments, as many of the two-year fixed-rate deals that are now expiring were priced, two years ago, at rates of between 4.19% and 4.89%, depending on the size of the deposit and the arrangement fee.




Warning


A small but increasing number of Northern Rock mortgage holders have been getting into trouble.


The percentage of customers who were in arrears of 3 months or more has risen from 0.47% in June last year to 0.57% by the end of 2007.


And the number of properties repossessed rose last year from 662 at the end of 2006 to 2,215 at the end of 2007.


As Mr Sandler warned, the strategy of shrinking the mortgage business could be thrown off course if the property market turns out to be worse then expected.


"In the event that the mortgage market starts to become harder, and the housing market becomes softer, there is no question that it becomes more challenging for us to achieve the redemption target," he told a news conference.



More savers wanted


The Northern Rock is not shutting up shop entirely.


Although it will stop making personal and business loans, it wants to draw in more savings.


Even with a 100% government guarantee that might seem a bit of tough target, but Mr Sandler said that savers had been returning in recent months.


"Our retail deposit base has been growing in the past few months at a satisfactory level," he said.


That has undoubtedly been helped by some widely-advertised chart-topping accounts.


But it seems unlikely that the Northern Rock is going to be quite so generous in the coming months.


To assuage the concerns of rivals banks and building societies that it might abuse its state guarantee, the Rock has promised that it will not compete too hard for savers' money and will avoid offering the best rates in various categories of savings accounts.


It will also cap its share of the total savings market to just 1.5%.



Difficult


Quite how it will be able to do this, while still attracting savers to a bank which has been in crisis, will be some balancing act for the new management team to achieve.


It has promised that for the rest of this year, its savings deals will not feature among the top three in any of the 15 different categories of savings deals compiled by the financial information service Moneyfacts.


Julia Harris of Moneyfacts said this would not be an easy thing to do, as the range of deals on offer changes all the time.


"We compile the charts on a daily basis," she pointed out.


"If the Northern Rock has the fifth-best deal, but the second and third ones are withdrawn by their lenders, then they could shoot into the top three," she
warned.