Government gives loan to Northern Rock to re-enter mortgage market
By politics.co.uk staff
Northern Rock is set to resume lending with up to £14 billion in new mortgages by 2011, the government has announced.
Chancellor Alistair Darling said Northern Rock will be allowed to lend up to 90 per cent of the home’s value, although most banks are refusing to lend more than 75 per cent.
About £5 billion in new mortgages will be available this year and up to £9 billion from 2010.
Mr Darling told BBC Radio 4’s Today programme: “It’s repaid about £18 billion of the loan the government made, and I said in January this year that because of the problems the mortgage market faced, instead of looking to wind down its business, it would be better for Northern Rock to maintain lending.”
Some of the funds will come from the taxpayer, the chancellor admitted, while Northern Rock will be given more time to repay its loan to the Bank of England.
The bank was nationalised last year after the Treasury’s search for the buyer failed and six months after the initial reports Northern Rock had approached the Bank of England for an emergency loan led to a run.
Northern Rock was instructed to run its mortgage book down and stopped new lending, to repay the £30 billion loan as soon as possible.
However, some critics said the sudden withdrawal of mortgages contributed to the sharp fall in house prices.
“Foreign banks have withdrawn from the market. What I want to do is use Northern Rock to fill that gap,” Mr Darling told the BBC.
Greg Hands, the shadow Treasury minister, said the announcement was a “volte-face”.
He said: “I think there will be a contrast between existing customers who are facing repossession and all these thousands of new customers who are getting very generous terms.”
But Liberal Democrat shadow chancellor, Vince Cable said the government should set out the conditions on which all future lending should be based.
“The Government has put the cart before the horse. Before spending billions of pounds of taxpayers’ money on new lending, ministers must set out in detail the basis on which future lending must take place.
“Otherwise many of the past problems of excessive lending leading to negative equity and repossessions could be recreated. Any new lending must be done on a safe basis.
“Alistair Darling says he wants Northern Rock to only lend up to 90 per cemt mortgages, but then refers the decision to the Financial Services Authoroity, ducking his responsibilities.
“This 90 per cent rule, which should apply to all lenders not just Northern Rock, is a start but is too general. We must work to create clear, simple mortgages which protect sensible borrowers.”
The Liberal Democrats have themselves set out proposals for a Safestart mortgage, with 85 per cent loans, falling to 75 per cent over five years on a repayment basis.
Writing in the Observer newspaper yesterday the prime minsitersaid the Financial Services Authority would be considering controls on mortgages of more than 100 per cent of a home’s value, and so-called high multiple mortgages offering loans of up to six times an applicant’s salary.
He added: “We do want 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 those on middle and modest incomes who wish to buy their home but who have not been able to save a huge deposit.”
The plan to give Northern Rock £14 billion to begin new lending is part of a package of measures being announced by the government this week which look set to clear the way for the Bank of England to begin quantative easing, whereby it prints more money to circulate around the economy, while the chancellor’s previous annoucement of a government backed insurance scheme for bank’s toxic assets is due to be created in the next couple of days.
