Northern Rock Tuesday, 24th February 2009

In a series of measures due this week to revive the U.K. banking industry, Chancellor of the Exchequer Alistair Darling ordered Northern Rock Plc to expand lending by 14 billion pounds ($20 billion),

This is aimed at pushing the availability of mortgages in the U.K. after unrest in financial markets stopped credit and sent property prices tumbling at their fastest pace since 1991. Northern Rock effectively closed its doors to new mortgages when it was nationalized 12 months ago.

The government is unhappy that institutions are rationing credit and holding back from customers the benefits of lower Bank of England interest rates after receiving 37 billion pounds in recapitalization funds. Towards the end of the week, Darling will detail a program to guarantee hundreds of billions of pounds in loans.

New capital will be beneficial for the U.K. as a whole because it will put less strain on the banks.

Last year was a difficult year for Northern Rock. But the Company has been substantially restructured and now are in a much better shape to move forward from here.

Banks approved 31,000 new mortgages in December, close to the lowest in a decade and below the 104,000 monthly average in 2007 before credit markets seized up. A dearth of credit quelled activity in the property market.

This is a huge U-turn for Northern Rock and the government, but is it going to make a massive difference? . Until we get credit flowing in this economy, nothing else is going to work.

Northern Rock, which became the first British institution to tap government funds after a run on its deposits in 2007, has been paying off Treasury loans since it was nationalized. Last month, Darling asked the bank to slow repayments until the industry is able to provide more mortgages.

Now, the government is directing Northern Rock to expand the value of its mortgage portfolio by 5 billion pounds this year and about 9 billion in 2010, depending on demand, according to a person with knowledge of the plan. The existing mortgage book will be siphoned off into a separate business, allowing new lending to take place unhampered.

The government loaned the Newcastle-based lender 3 billion pounds in July. Northern Rock will be able to delay repayments of that loan and channel that money, along with any other profit from its existing mortgage book, to fund new mortgages.
It would be good to see the reinvention of the traditional savings and mortgage bank in Britain, for loans to be made on prudent and careful terms, not just to people with large deposits, but to first-time buyers and those on middle and modest incomes
Northern Rock was among the banks offering mortgages without a deposit from the borrower. Darling said Northern Rock would offer loans of up to 90 percent of property prices.

Today’s measures will allow banks to fund their activity by creating a new class of non-voting share, the Telegraph said. This would allow for dividend payments without diluting the value of stakes held by existing shareholders.