The Financial Times reports today that Northern Rock will begin making loans against 90% of a property’s value as early as Monday.
Northern Rock, which was established 30 years ago as the result of a merger between two large British building societies (roughly equivalent to savings and loans), was bailed out almost exactly three years ago by the British government. The FT reports that the firm will introduce the new 90% mortgages (up from the current 85% maximum) in order to boost earnings and make it more attractive to potential purchasers.
Why is this a problem?
If you borrow £90 to purchase a property that is worth £100 and property prices fall by 10% or more (“That could never happen!” I hear you say), suddenly the loan doesn’t look so good. If the bank needs to foreclose, it may not recover the loan value. Of course, lots of foreclosures means that lots of properties will hit the market and prices will fall even further.
According to the FT: “Northern Rock’s aggressive boom-time lending practices, including the Together mortgage that offered borrowers up to 125 per cent of their property value, caused one of the most high-profile failures of the financial crisis.”
True, it’s still a long way to 125%, but the shift from 85% to 90% suggests that the team at Northern Rock might want to brush up on their firm’s history…