Page last updated at 13:22 GMT, Tuesday, 18 November 2008

Rock arrears driven by 125% loans

Northern Rock office
Northern Rock's 125% home loans came under scrutiny

Arrears on controversial home loans of up to 125% of the value of a property are driving Northern Rock's repossession rate.

"Together" deals account for a third of the the Rock's mortgage book, but half of the number of mortgages in arrears and three-quarters of repossessions.

But Rock bosses told a committee of MPs they wanted to lead the way in helping people avoid losing their homes.

Buy-to-let specialist Bradford and Bingley was also under the spotlight.

The two nationalised bank's management teams faced a Treasury Committee banking inquiry hearing.

High-value deals

Northern Rock came under particular scrutiny over claims that the lender was "aggressive" in its repossessions policy.

This claim was strenuously denied by chief executive Gary Hoffman, although he warned that rising unemployment and falling house prices would increase the numbers in arrears.

Northern Rock's Together mortgages - which offered loans of up to 125% of a property's value - were heavily criticised when the bank was nationalised.

I believe you have inherited a shambolic organisation with a giant headache
John McFall
Treasury Committee chairman about B&B

Mr Hoffman said that these mortgages had worked well in getting first-time buyers on the property ladder during the booming market.

But now with some customers struggling to repay these mortgages, because they are often less well-off, Northern Rock's repossession rate has risen above the national average.

Latest figures showed the proportion of Together mortgage customers in arrears for more than three months stood at 3.1%, whereas the industry average was 1.33%.

Mr Hoffman said he wanted the bank to lead the way in creating schemes to help people avoid repossessions, but the bank had to act in the same way as the rest of the industry.

"We want to make sure customers stay in their home. Repossession is a last resort," he said.

Executive chairman Ron Sandler said only 1% of the repayment of the debt to the government was funded by repossessions, so there was no benefit in trying to push up the repossession rate for that purpose.

He said there would be no return of the bank to private ownership in the near future, with the economic situation making it more difficult.

Buy-to-let 'closed'

The Rock is doubling the number of staff dealing with arrears. The same trend can be seen at Bradford and Bingley (B&B), which has dominated the UK buy-to-let mortgage market in recent years.

B&B offices in Bingley
Job losses at Bradford and Bingley will happen over time

B&B executive chairman Richard Pym said he expected the number of staff dealing with arrears inquiries to double, from the 200 employed in August, by the time arrears levels hit their peak next year.

He added that the buy-to-let housing market was "closed". So many deals had been withdrawn that the market was completely different to a year ago.

B&B, which had its mortgage business nationalised in September, has a 40bn loan book.

Some 60% of these mortgages are buy-to-let customers and another 20% are self-certified mortgages, which are common among people such as the self-employed.

Mr Pym told the committee that at the end of September the proportion of borrowers in arrears on their mortgages stood at 3%, higher than the industry average.

One independent report suggested that, taking falling house prices into account, B&B could lose about 1.2bn.

The buy-to-let market is expected to be worse hit than the residential mortgage market. Mr Pym, however, said the recent cut in the Bank rate to 3% would have a "significant effect" in assisting landlords, assuming rents did not also fall dramatically.

Job losses

At the end of August, B&B had 3,100 staff, the committee heard.

This dropped by 1,700 following the transfer of the savings business to Abbey, and another 300 jobs went when business was closed to new mortgages.

Mr Pym said it was "mindful of its obligations" to the community in West Yorkshire. Any further job losses would be phased, with 50 to 100 voluntary redundancies in the pipeline.

An agreement with the government means there will be no compulsory redundancies before 31 March next year. Yet he was unable to give a final level of job losses by the end of next year.

Former chairman Rod Kent said the board was "deeply sorry" that the bank needed to be nationalised.

Mr Pym said that there were only queues at four branches at the height of the crisis, and every customer who wanted to move savings could do so when the outflow of customers' funds reached 200m online.

Committee chairman John McFall, closing the session, told Mr Pym: "I believe you have inherited a shambolic organisation with a giant headache."

Mr Pym confirmed he would step down from his job next summer, without any compensation, but having picked up a guaranteed cash bonus of 326,000 spread over two years.

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