Sub prime definition

Brainwashed

Martin Lewis on radio today said when briefly explaining the reason for Northern Rock's problems that they were largely due to their "sub prime" lending. All other explanations I have read from financial experts have said NR did not lend to sub prime customers and had not bought any sub prime 'blocks' from other lenders - in fact they had one of the lowest default records. Does anyone know whether or not NR lent to sub prime customers? Is the conflicting comment because different financial journalists have varying definitions of what is 'sub prime'?

sarkin

Northern rock are famous for lending more than the value of the property and is considered high risk lending. They did try to get into the sub prime market I have some brochures here for mortgage with CCJ and missed payments. The market was already crowded and they could not get enough market share. I thought Northern Rocks problem was or is that the Americans went t*ts up, this stopped the investment banks buying and selling mortgage debt. As Northern Rock funded most of the business on the money markets they ran out of cash fast. So yes they are affected by sub prime but ~American not UK.

homer_j_3

Northern Rock do not lend to the sub prime market. They offer(ed) sub prime mortgages which are/were done through a company called Southern Pacific Mortgages Ltd (SPML). NR do not take on the risk on to their books full stop.

Either you have misunderstood what Martin has said or Martin has misunderstood the way NR work.

NR borrowed from the same places that Sub Prime lenders did and due to these markets tightening, they ran out of funding - this may be what he was saying?

alexandlee

Hi Homer_j without being too condescending to the average man on the street i think you've gone a step further than most people would delve.

The man on the street could walk into a branch/broker and get a NR sub prime mortgage - and thats the way the press/media present the story.
Informed people like yourself appreciate in reality where spml fit into the equation, but the product will be packaged and presented as though its an NR mortgage (and proc fees would be paid by nr rather than spml?)

Perhaps that's what Martin / Brainwashed and Sarkin were commenting on?

homer_j_3

Not sure and I take your comments in the tone intended.

This is what it says in their product guides

Our Specialist Lending product range is brought to you in conjunction with Southern Pacific Mortgage Limited ("SPML").
SPML will be the lender for all of our Specialist Lending mortgage products. Northern Rock will distribute these products as
well as underwriting and processing all applications through to completion. At completion, it will be SPML funds that are
advanced to your client and the ongoing administration of your client's mortgage account will be carried out by SPML. To
ensure a smooth handover SPML will send a welcome letter to your client advising them of their new mortgage account number,
when their first payment is due and all relevant contact details.

On the front page of the application form

Northern Rock plc processes mortgage applications on behalf of
Southern Pacific Mortgage Limited.
Mortgages are advanced and administered by Southern Pacific
Mortgage Limited. The borrower will enter into a legal agreement with
Southern Pacific Mortgage Limited. Southern Pacific Mortgage Limited
is authorised and regulated bythe Financial ServicesAuthority

The direct Debit Mandate has SPML printed all over it.

NR do not hide the fact that all they do is pass the paperwork to SPML once processed for them to do everything. It is exactly the same with the A&L specialist range.

It could quite easily been a misunderstanding by the OP to what Martin had said because I have not seen 1 piece of news that has said they have got into this mess through their sub prime lending - in fact, there has been nothing but positive commentary on the quality of their assets.

Leon_W

homer is quite correct.

NR are not (and never were) "subprime lenders". I recount a story from a Business Development Manager that came to see me one day from NR. We were discusing their Together mortgage and the risks that they took whilst lending 125% of the property value at relatively high income multiples. The facts were that arrears were lower than the industry average on this type of mortgage. The reason was because they set the bar quite high as to credit score and rating.

NR's problems are nothing to do with "sub prime" but just the simple fact that there is nobody out there willing to buy mortgage books. And as homer quite rightly states, SPML took on the higher risk lending which was just repackaged under a more "high street" friendly name, :ie Northern Rock

MarkyMarkD

Northern Rock's problems are entirely due to their funding methodology, and nothing at all to do with the type of loans they undertook.

But as others have said, NR's loans were NOT sub-prime. At worst they were marginally higher risk prime lending than other lenders.

Lending a higher income multiple, or higher percentage of the property value, to a customer with a good credit history is NOT sub-prime lending by any sensible definition.

jamesd

Northern Rock's problems are not because of sub-prime lending done by Northern Rock. They are because of the US sub-prime lending and its effects on money markets that prevented Northern Rock from doing its usual refinancing of short term mortgage debt - the money it borrowed to lend as mortgages.

The Granite part of Northern Rock was simply unable to borrow money at its usual rates and had to substantially increase them to raise money at all, to the point where borrowing from the Bank of England was cheaper and possible, instead of expensive and very difficult. See my summary of the September report of Granite's borrowing for details before continuing reading - it has the most important bit.

The Granite mortgage breakdown in September as as follows:

Fixed rate: 59.31%
Together: 29.07% (this is the one that lends above property value)
Capped: 0.06%
Variable rate: 7.22%
Tracker: 4.34%

Further their loan to value breakdown was:
Above 100%: 0.49%
95-100%: 9.76%
90-95%: 20.2%
85-90%: 15.55%
80-85%: 11.81%
the rest: 42.19%

So, not a lot above property value.

Of 454,630 total loans they held in Granite, 189 were repossessed in September. Historic average loss was about 12,500 per repossession. Assuming average losses those 189 would represent a future loss of 2.3 million and that's not enough to cause them problems when the total pool value is 53,411 million. It's 0.004%, or one Pound lost per 23,200 lent.

Some caution is needed because these are only the figures for the Granite part of the business, not the whole collection of mortgages.