So Northern Rock have a good mortgage book, eh?

WTF?_2

OK, don't believe everything you see in the papers but if it's true, so much for all the guff about no real danger to the taxpayer:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/22/ccrock122.xml

So what exactly does the taxpayer now own for its £25bn loan and £30bn guarantee? And just how "high quality" is it? Compared with peers, not awfully appears to be the answer. A key measure of mortgage quality is the loan-to-value (LTV) ratio, which measures how much of the property's value the bank lent to the buyer. As the table shows, Northern Rock's LTV is the worst among its peers. Strip out the behaviour of the first six months of last year and the picture is starker.

..

"Undoubtedly, Northern Rock has the riskiest mortgage book of its peers," one analyst, who declined to be named, said. "Northern Rock was pushing the envelope. Any decline in the housing market will affect it more as its takes a higher LTV and has been lending most aggressively most recently."

:eek:

Hereward

!!!!!!? wrote: »

OK, don't believe everything you see in the papers but if it's true, so much for all the guff about no real danger to the taxpayer:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/22/ccrock122.xml

So what exactly does the taxpayer now own for its £25bn loan and £30bn guarantee? And just how "high quality" is it? Compared with peers, not awfully appears to be the answer. A key measure of mortgage quality is the loan-to-value (LTV) ratio, which measures how much of the property's value the bank lent to the buyer. As the table shows, Northern Rock's LTV is the worst among its peers. Strip out the behaviour of the first six months of last year and the picture is starker.

..

"Undoubtedly, Northern Rock has the riskiest mortgage book of its peers," one analyst, who declined to be named, said. "Northern Rock was pushing the envelope. Any decline in the housing market will affect it more as its takes a higher LTV and has been lending most aggressively most recently."

:eek:

Loan-to Value is only a problem if the lender needs to repossess the property. As long as the people who have taken out NR mortgages continue to pay them then there is no problem.

NR's problems were caused by other financial institutions believing that NR (as it reports its finances earlier than everyone else) held a large amount of sub-prime mortgages. It just happened that it didn't, but the rumour was enough for other not to lend in the cash it needed to run its day to day business and go cap in hand to the Bank of England, as the lender of last resort. Vey few people took notice that Barclays had to the same thin two weeks earlier.

WTF?_2

Hereward wrote: »

Loan-to Value is only a problem if the lender needs to repossess the property. As long as the people who have taken out NR mortgages continue to pay them then there is no problem.

NR's problems were caused by other financial institutions believing that NR (as it reports its finances earlier than everyone else) held a large amount of sub-prime mortgages. It just happened that it didn't, but the rumour was enough for other not to lend in the cash it needed to run its day to day business and go cap in hand to the Bank of England, as the lender of last resort. Vey few people took notice that Barclays had to the same thin two weeks earlier.

Point 1. LTV isn't just a big deal when the bank comes a-knocking to repossess. It also means the borrower might be unable to remortgage when they go off their typical 2-year teaser rate ... leaving them struggling to make mortgage payments .... making it more likely they will be repossessed .... leaving the bank (and customer) in the doo-doo.

This is why responsible lenders try to set a sensible limit for LTV. eg. 90% max. Seems like NR may have been less than responsible in this matter.

Not to worry though, we the taxpayer will pick up the pieces. :rolleyes:



Point 2. NR's business failed because their model of borrowing cheap money short term, securitizing it and selling it on the debt markets was no longer viable when credit conditions changed.

Nothing to do with people suspecting sub-prime and refusing to lend to them. Everything to do with betting the house on cheap, short-term credit being easily available forever and basing your business strategy around it.

Hoario54

Hereward wrote: »

As long as the people who have taken out NR mortgages continue to pay them then there is no problem.

Great, everything will be fine then, thank god there are no signs of an economic slowdown on the horizon that could affect employment and any NR mortgage holders ability to pay...;)

Hereward wrote: »

NR's problems were caused by other financial institutions believing that NR (as it reports its finances earlier than everyone else) held a large amount of sub-prime mortgages. It just happened that it didn't...

Not Sub Prime in the strictest sense, but they did have some of the "most generous" underwriting practices around. This was based on the assumption that house prices only ever go up so there is very little risk involved in lending at a high LTV, or even above a property value (such as the 125% product), assuming the applicant can fog a mirror.

NR's loan book is a big steaming turd that can't be polished.

If it really was good quality it would have been snapped up by now.

Hereward

!!!!!!? wrote: »

Point 1. LTV isn't just a big deal when the bank comes a-knocking to repossess. It also means the borrower might be unable to remortgage when they go off their typical 2-year teaser rate ... leaving them struggling to make mortgage payments .... making it more likely they will be repossessed .... leaving the bank (and customer) in the doo-doo.

This is why responsible lenders try to set a sensible limit for LTV. eg. 90% max. Seems like NR may have been less than responsible in this matter.

Not to worry though, we the taxpayer will pick up the pieces. :rolleyes:

Your point the OP was about NR and thei attitude to LTV not those taking out the mortgages. LTV is still isn't problem if the owner can afford the repayments when (if) they have to pay the NR's standard rate. LTV also isn't a prblem if the owner can sell the property for more than the the morgage amount before it is repossed, (or if NR can sell the property for more than the outstanding mortage).

Responsible lenders look at how much someone can afford if interest rates when up by 50% before giving them a loan. The LTV limit is there to protect the lender, not the borrower. In most cases borrowers with high LTV are required to pay for mortgage indemnity protection, which is designed to cover the lender if the sale price after repossession is less than the outstanding balance. I still fail to see how NR's LTV represents a risk to the taxpayer with all of this extra protection to get through first.

Point 2. NR's business failed because their model of borrowing cheap money short term, securitizing it and selling it on the debt markets was no longer viable when credit conditions changed.

Nothing to do with people suspecting sub-prime and refusing to lend to them. Everything to do with betting the house on cheap, short-term credit being easily available forever and basing your business strategy around it.

Whilst I agree that NR's business model was an issue, it still comes back to others not wanting to lend it money in the short term. If this was not the case then NR would still be borrowing on the short-term money markets.

Hereward

Hoario54 wrote: »

Great, everything will be fine then, thank god there are no signs of an economic slowdown on the horizon that could affect employment and any NR mortgage holders ability to pay...;)

Not Sub Prime in the strictest sense, but they did have some of the "most generous" underwriting practices around. This was based on the assumption that house prices only ever go up so there is very little risk involved in lending at a high LTV, or even above a property value (such as the 125% product), assuming the applicant can fog a mirror.

NR's loan book is a big steaming turd that can't be polished.

If it really was good quality it would have been snapped up by now.

If you hadn't noticed, there's a credit crunch going on at the moment; therefore nobody can really afford NR at its current prices without relying on the same forces that pushed NR to the brink without some sort of external help.

WTF?_2

Hereward wrote: »

Your point the OP was about NR and thei attitude to LTV not those taking out the mortgages. LTV is still isn't problem if the owner can afford the repayments when (if) they have to pay the NR's standard rate. LTV also isn't a prblem if the owner can sell the property for more than the the morgage amount before it is repossed, (or if NR can sell the property for more than the outstanding mortage).

Responsible lenders look at how much someone can afford if interest rates when up by 50% before giving them a loan. The LTV limit is there to protect the lender, not the borrower. In most cases borrowers with high LTV are required to pay for mortgage indemnity protection, which is designed to cover the lender if the sale price after repossession is less than the outstanding balance. I still fail to see how NR's LTV represents a risk to the taxpayer with all of this extra protection to get through first.

So you don't see a problem with asset values failing to cover the loan secured against them presenting a risk to those backing the asset in the event that economic conditions toughen and defaults increase?

Hereward wrote: »

Whilst I agree that NR's business model was an issue, it still comes back to others not wanting to lend it money in the short term. If this was not the case then NR would still be borrowing on the short-term money markets.

NRs business model relied on it having access to cheap, short term credit which could be loaned long term as mortgages. The loans were then securitized and sold on to the market. This enabled them to pay back the short term lenders and get them off their books, so they could go back and borrow and loan even more.

The short term credit market became very much more expensive. The market for mortgage backed securities dried up. This left NR high and dry as they had 'bet the house' on being able to operate like this. Concerns that their own lending practices might be sub-prime (as now appears to be the case) didn't have much to do with it.

HelpWhereIcan

LTV plays a part but ... while they were generous with the amount they loaned, Northern Rock's credit scoring was one of the more strict especially for high LTV products.

This means that they would lend more, but only to people with a traceable, clean credit history. (The sub prime range was a white labelling of SPML's range and never stays anywhere near Northern Rock's book).

From http://companyinfo.northernrock.co.uk/investorRelations/results/stockEx070725.asp

"Credit quality remains robust. 0.47% of mortgage accounts 3 months or more in arrears (31 December 2006 - 0.42%) - around half of industry average"

From

http://www.cml.org.uk/cml/media/press/1239

"Taking into account the revisions, the number of mortgages in arrears of three months or more at the end of June rose to an estimated 125,100, up 4% compared with the end of December but 3% lower than at the end of June 2006. Of these, the majority (71,800) were in arrears of 3-6 months, while 38,300 were in arrears of 6-12 months, and 15,000 more than 12 months. Around 1% of all mortgages were in arrears – this proportion has been stable at low levels for several years."

That has more to do with the quality (or otherwise) of any lender's book than simply the Loan to Value.

Remember, most mortgages that Northern Rock did that were 125% had a 90% mortgage with an unsecured loan of no more than £30000 making up the rest. The ones with high income multiples were generally on 5 year (or longer) fixed products rather than the 2 years you refer to.

This potentially helps people with the issues around remortgaging.

eg if you took a 125% mortgage in my area in Jan 2005, say

£120,000 on a house worth £100,000 over 25 years at a fixed rate of 5.59% (£90,000 secured with the maximum available £30,000 unsecured)

that house would now be worth approx £ 118,926 http://www.hbosplc.com/economy/housepricecalculator.asp

your balance would be approximately £112,574 http://www.hsh.com/calc-amort.html

of which around £84,430 would be secured with the rest (£28324) unsecured. http://www.hsh.com/calc-amort.html

Someone with a decent credit history (the standard Northern Rock Together customer) could comfortably get a remortgage for £107000 based on a property worth £118,926 at a competitive rate (say 5 years fixed at 5.63% from the Nationwide) and get a personal loan for the remaining £5574 from a normal personal loan provider. Not quite the traumatic shock you describe.

- not to mention that Birmingham Midshires, A&L and Coventry B Soc offer 125% products of their own.

Bearing in mind they would only lend to 'clean' customers in this scenario they have done something to mitigate any risk that may be posed by a contracting economy. Not gone away by any stretch of the imagination, but nowehere near as simplistic as made out to be and not putting them at hugely more risk than say the HBoS and Royal Bank of Scotland Groups who loaned very heavily at over 95% (and still do).

Plus, one of the advantages of mass securitisation was the fact that they could (at one time) pick and choose which accounts they kept on their books and are likely to have kept the better quality and sold on the lower.

HelpWhereIcan

The ones with high income multiples were generally on 5 year (or longer) fixed products rather than the 2 years you refer to.

and were more often than not to people with High Credit Scores earning over £30,000.

An old guide I have from 2005 gives the following maximums:

Someone on with an income of over £100k with a high credit score could get 5.4x income (or 5.9 x on a fixed rate of 5 years or more)

BUT

someone on £25,000 with a low credit score (still prime with no adverse history) could get no more than 3.9 times (or 4.4 times on a fixed rate of 5 years or more).

Someone with an income below £25,000 would get less than that. Sometimes no more than the 'standard' 3.5x or 2.8x joint.

It is therefore wrong to claim that they loaned huge amounts to everyone - just the better scoring, higher earning customers.

I had customers passing with the Halifax and other lenders but failing (i.e not even a Low Score pass) with the Northern Rock.

I have used them all of a dozen times in the last 3 years and would not be that keen to defend everything about them, but feel that focussing on Loan to value in isolation is a great bit of journalism :rolleyes:

Although, the article does have the paragraphs that the OP missed out

"Northern Rock lent an average 78pc of the value of a home in the six months to June, just as the market peaked. The next closest lender was Alliance & Leicester, with 67pc. Break the numbers down further and it emerges that £3.3bn worth of mortgages were sold in the first half of 2007 with an LTV of more than 90pc, and another £1.46bn of riskier buy-to-let deals were signed. If Credit Suisse is correct in forecasting a 10pc house price collapse this year, Northern Rock will almost certainly have to crystallise a loss on these assets.

In total, Northern Rock has lent almost £21bn through its controversial "Together" product, which offers loans of 125pc on a property's value, and £6.2bn of buy-to-let. Both products are considered higher risk, yet make up a third of the £85.2bn residential mortgage book. In all, some £26bn of its mortgages have an LTV of 80pc or more. On top of that sit a further £7.8bn of unsecured loans."

Not quite the instant negative equity you imply, but the point remains.

To focus on Buy to Let as more risky is a little unfair as Northern Rock were not the only Buy to Let lender and other lenders will be more heavily exposed to the risks of Buy to Let than Northern Rock, but that would not be a story.

Hereward

!!!!!!? wrote: »

So you don't see a problem with asset values failing to cover the loan secured against them presenting a risk to those backing the asset in the event that economic conditions toughen and defaults increase?

There is indeed a problem if the value of an asset class falls below the debt secured on it; however, as I stated in the post you quoted, mortgage lenders require borrowers with high LTV mortgates (this can be as low as 80% for some lenders) for the borrower to pay for mortgage indemnity protection (aka mortgage protection insurance) the insures the lender again a fall in the asset value and the borrower defaulting. As HelpWhereIcan states NR's 125% LTV mortgages are split into two loans and I expect that the secured part needed to have mortgage indemnity protection for the full amount (inclucluding the unsecured bit).

devils_advocate

Plus, one of the advantages of mass securitisation was the fact that they could (at one time) pick and choose which accounts they kept on their books and are likely to have kept the better quality and sold on the lower.

But when securitising, dont you have to keep the equity tranche before you can get a decent rating (and therefore price) on the others?