NORTHERN Rock Plc, the first British bank to suffer a run in 150 years, will receive as much as 3.4 billion pounds (US$6.7 billion) from the government, as house prices decline and repossessions soar.
Britain's government will convert some outstanding debt and preference shares into equity in the mortgage lender after it posted a 592-million-pound loss for the first half, the English bank said yesterday, Bloomberg News reported. It repaid 9.4 billion pounds to the Bank of England, about a third of its 27-billion-pound debt.
Northern Rock was bailed out by the central bank last year when it ran out of funds and was nationalized by Chancellor of the Exchequer Alistair Darling in February. The bank's losses were worsened by a tripling in arrears to 1.2 percent, amid the steepest decline in house prices since 1992.
"Darling assured Parliament that taxpayer loans to Northern Rock would be fully secured on mortgage assets," said Vincent Cable, the opposition Liberal Democrat Treasury spokesman. "This is clearly not true. (A total of) 3.4 billion pounds of the Government's loan to Northern Rock is being converted into ordinary shares, which rank right at the bottom for repayment. Continuing losses at the bank put this money at great risk."
Repossessions rose 67 percent to 3,710 by the end of June, Northern Rock said yesterday. The net loss for the six months to June 30 compared to a profit of 188.2 million pounds a year ago.
"Northern Rock is actually one of the contributors to the worsening mortgage-market outlook," said Irfan Younus, an analyst at NCB Stockbrokers Ltd in London. The bank is encouraging borrowers to move to other lenders to help repay its government debt. They will pay higher rates, which may create a higher rate of defaults, Younus said.
"Other banks have taken the cream of Northern Rock's mortgages, leaving the rest to curdle," Cable said.
"Northern Rock needs more share capital," Darling told BBC Radio 4 yesterday. "It has got to come to us. If we had not intervened to save Northern Rock, it wouldn't just have been Northern Rock; other banks might have gone under, so we had to do that."
Britain's decade-long housing boom is unraveling: The average value of a home dropped 8.1 percent from a year earlier, the biggest decline since at least 1991, Nationwide Building Society said last week. Those declines may leave about 1.7 million UK homeowners with houses worth less than the amount they owe on their mortgage, said Standard & Poor's.
The housing slowdown is combining with rising oil prices to squeeze consumer spending, and the rest of Britain's economy. UK services from banks to airlines contracted in July, and factory production unexpectedly dropped for a fourth month in June.
The loss reflected Northern Rock's high funding costs, increasing bad loans and reduced lending, Chairman Ron Sandler said yesterday.
The bank will be "significantly" money-losing this year amid declining credit quality, the chairman said.