Comments: Rocky times

Does anyone know the terms of this provision, particularly the length of the loan, are we still looking at 3 months ? and presumably it is at a rate above 6.75%. Any ideas ?

Posted by assetpriceinflation at September 14, 2007 09:58 AM

Hmm, is it that surprising that credit markets might be unwilling to buy debt from a mortgage underwriter offering 125% LTV mortgages when housing markets around the globe are headed down and risk premiums are rising? And how exactly does a sound financial institution expand their residential lending by 55% in just 8 months as Northern Rock did in the first part of this year without taking risks?

This bailout is a joke. Now the Bank of England no longer needs to pretend that they aren't financing the housing boom through cheap credit -- they've just become the 5th largest mortgage underwriter in the country.

Posted by RichB at September 14, 2007 10:35 AM

Market conditions have been unusual for many years. Central Banks have flooded the world with cheap money. The primary concept of risk had almost been smooth-talked out of existence by the bonus hunters. The markets are now adjusting to normal concepts of risk and credit control after a sustained period of abnormality, not the other way around.

Everybody with an ounce of sense knew that risk would eventually be re-priced, and that the repricing would probably be abrupt. If the MD and board of NR did not see this coming, and provide for it, they should resign. Indeed, the Governor himself warned about these systemic dangers on more than one occasion, but now he is running to bail out those that did not listen to him? Weak.

Northern Rock has made enormous profits throughout the boom (big bonuses for its board, and dividends for its shareholders); it has been one of the primary conduits of the easy money that has created an unsustainable and socially irresponsible boom in UK property prices. If the Bank is having to bail it out now, then what is the situation going to look like when the UK property market mirrors the US and starts to correct?

Moral hazard....absolutely. It looks like we have a system of unashamed crony capitalism here: When the boom is on, you ignore risk and make as much loot as you can, when things turn sour you get bailed out. If Northern Rock is 'too big to fail' then who isn't? The Bank should have let it go, or forced it into being taken over by a bigger fish.

For the banks its heads I win, tail you lose. In the long run this will perpetuate resource misalocation, and lead to more severe economic disturbances.

Posted by T Gumbrell at September 14, 2007 10:49 AM

The Bank has for years taken aim at inflation targets that exclude housing related costs. Yet when the housing market overheats, lenders act irresponsibly and the financial markets freeze under a welter of housing related bad loans The Bank is expected to act.

It might appear that the Bank's hands are tied when housing prices are on the up, but when they threaten to drop and possibly bring about financial chaos in the process The Bank is under pressure to step in (though to be fair it has been more resistant to intervention than its counterparts the ECB and The Fed).

There's a contradiction in there somewhere. Giving the MPC control over interest rate policy was supposed to depoliticise the whole matter and bring both confidence and stability to the markets. Yet the government can still engineer the same sort of feelgood factor by allowing housing and consumer spending to balloon.

An independent MPC is a good thing but perhaps its remit needs to be widened to prevent these sorts of dilemmas in future....

Posted by Jonathan at September 14, 2007 12:02 PM

There seems to be agreement among the posters: The Bank leaves the bubble to inflate saying 'that's not our problem, not our remit', but then when the expansion of the bubble is threatened by a foreseen and predictable realignment of market forces, the Bank immediately steps in to keep it inflated.

We are not there quite yet, but if things continue like this then maybe the Bank should swap 'maintaing the integrity of the financial system' for 'keeping the debt/asset bubble inflated'.

Britain's 'sub-prime' mortage market is 10% of the market, but once you add the other 10% (guess) of self-cert liar loans, and the other 10% (guess) of highly leveraged self-cert BTL loans made against negative-yield assets, the situation looks far less rosy.

Or am I just a casandra?, afterall, the Bank has looked at Northern Rock's loan book and proclaimed it solid as a rock. Guess that's why the markets will not touch it with a barge pole! But, then the markets are 'mis-functioning' at the moment aren't they! If only we could rely on those markets to behave rationally, then we wouldn't need all this intervention. But.....alas....

Posted by T Gumbrell at September 14, 2007 01:10 PM

Oh Gumbrell. You're making some reasonably sensible points about moral hazard and the Bank's wider role in this and then you go and spoil it all by giving us some silly made-up statistics.

Posted by David Smith at September 14, 2007 01:20 PM

David - thanks for the compliment.

Re my 'stats': there was a discussion on your site a few weeks back about definitions of sub-prime etc. At that time I asked if anyone had/knew the wherabouts of stats for the 'weaker' loan types. Nobody responded, including your good self I'm sorry, but I would not know where to find these stats, that is why I put, in brackets, the word 'guess' after my figures. There was no intent to deceive, or claim to have the real figures. I made it clear that I was guessing.

Everybody in the UK knows that self-cert (liar loans) have been a significant section of the market for years now. This is no secret: Any mortgage broker would advise you to get one if your income mulitplier didn't get you to where you needed to be. You can download P60s, and payslips from a proliferation of websites. Are you going to tell me that they are to provide people with 'replacements'??

My point is generally understood I think, and I hoped that someone could point me in the direction of the real figures if they exist. The mortgage market in the UK may have less 'sub-prime' than the US, but this is perhaps definitional, and the reality is probably somewhat murkier.

At this stage in the credit market correction, I would question that the markets are only responding to concerns about CDOs on the books of UK banks that have originated in the US. I think the markets are beginning to wake up to the fact that the UK property market and the credit sub-structure than underpins it might not be as solid as previously thought. The re-pricing of housebuilder stocks today supports this point. I also think that Darling knows this, GB knows this, and Mervyn knows this as well. Hence the bailout. They are crapping themselves 'no more boom and bust' and all that!

This mess started with property (in the US), and will quite possibly lead to more of the same in many other countries.

When the people start to see and fear this, it will become self-fulfilling. But, when will the people see this? Maybe, when David Smith writes his main feature on the imminent property correction!.....when the last bull turns bear!

Posted by T Gumbrell at September 14, 2007 02:12 PM