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Nationalized UK bank to expand mortgage lending

LONDON - Nationalized lender Northern Rock said Monday it will increase its home loan business, part of the British government’s effort to stimulate the country’s depressed housing market.

The company said it would make 5 billion pounds ($7.2 billion) in new mortgage lending available this year, and between 3 billion pounds and 9 billion pounds in subsequent years. Analysts called it a modest but positive step toward reviving normal lending.

“The challenge that we are facing is a challenge faced in every country and that is to make sure that the banks start lending again to the people of this country, to businesses and to home owners,” Prime Minister Gordon Brown said.

No bonuses will be paid to executives and senior managers for 2008, but front-line employees would get a 10 percent bonus, the company said. It expects to report a pretax loss of 1.4 billion pounds for last year, and said that the rate of arrears on residential mortgages had risen in the last quarter of 2008.

Northern Rock said the new lending will be financed partly from deposits and repayments on existing loans, and partly through government support _ an increase in the government’s loan and a looser repayment schedule of the state aid.

“The new lending will be made on commercial terms to ensure that it represents good value for money for the taxpayer,” the company said.

“To enable Northern Rock to focus on new lending, the company will be restructured so that the back book of mortgages is managed separately to its other business,” it added.

The new mortgage lending will mean that Northern Rock will not repay its government loans as fast as planned.

“We were asking it to repay the total loan that we made to it, which was about 27 billion pounds,” said Treasury chief Alistair Darling. “So what is happening is that the rate at which they pay us back will slow down.”

Analysts said the impact may be limited.

“In overall market terms anything that improves the supply of lending is a positive,” said Michael Coogan, director-general of the Council of Mortgage Lenders.

He noted that Northern Rock had paid back 18 billion pounds on its government loans largely through mortgage redemption.

“This was 18 billion pounds that had to be absorbed by the rest of the other mortgage lenders. By removing this market pressure, other lenders as well as Northern Rock should experience an increased capacity to lend to other borrowers,” Coogan said.

“Rightly this news should be welcomed even though this is a small fraction compared to what was being made available to mortgage borrowers a couple of years ago,” said Howard Wheeldon, senior strategist at BGC Partners in London.

Treasury chief Alistair Darling said the bank, which was taken over by the government last year after it fell victim to the credit crisis, would not be lending more than 90 percent of a property’s value.

“Northern Rock are not going to do 100 percent. They had their fingers very badly burned and, rather more importantly, a lot of their customers had their fingers very badly burned,” Darling said in an interview with BBC radio.

Darling added that the increase in lending at Northern Rock should be weighed “against a background where a lot of the foreign-based banks have withdrawn.”

Mortgage lending in Britain has collapsed in the last year. The Council of Mortgage Lenders reported last week that lending in January was at the lowest level in eight years at 12.4 billion pounds ($17.9 billion), barely more than half the total in January 2008. House prices have also turned downward.

“At last the government is doing something that is quite sensible,” said Ray Boulger of mortgage adviser John Charcol. “If you get Northern Rock coming into the market at 90 percent, that will encourage some of the other lenders to come into it as well.”

Northern Rock said it expected to report a full year loss of 1.4 billion pounds, including loan impairment charges of 900 million pounds. Residential arrears of more than three months were 2.92 percent at the end of 2008, compared to 1.87 percent in third quarter, the bank said.