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    We’re still counting the cost of the Northern Rock bailouts

    21 May 2020

    Loans, grants, mortgage payment holidays: there is a cornucopia of help on offer for anyone struck down financially by the coronavirus crisis. Meanwhile, we are still trying to clear up the damage left from the bailouts of the last financial crisis, in 2008/9.

    The banking bailouts helped Fred ‘the Shred’ Goodwin hang on to his Royal Bank of Scotland pension. They helped save banking jobs, preserve savers’ deposits and, according to Gordon Brown in his slip of the tongue in the House of Commons, they ‘saved the world’. But if you were a mortgage customer at Northern Rock you may not be feeling that you were bailed out. Rather you may think you were thrown to the wolves.

    When Northern Rock was nationalised in 2008 its mortgage customers initially carried on making repayments to the government-owned remains of the bank. But over the years their loans were sold off. Many Northern Rock loans were sub-prime to begin with — its infamous ‘Together’ mortgage was a secured mortgage linked to an unsecured loan, jointly worth up to 125 per cent of the borrower’s home. Collapsing house prices pushed these loans further into negative equity. The main retail banks, which were trying to shore up their books, weren’t going to take on these loans. Until 2015 the mortgages were held by a public-owned vehicle called UK Asset Resolution but were then auctioned off for £5.5 billion to US private equity group Cerberus — which also took on £8 billion in liabilities.

    But many were then sold on again, in some cases multiple times, to a web of other private equity groups — ‘vulture lenders’ as they are described by the ‘mortgage prisoners’, a 3,000-strong group of homeowners who featured in BBC Panorama in 2018.

    Needless to say, the vultures wanted rich rewards for taking on these loans. According to Rachel Neale, who helps run the group, some are paying interest rates of 8 or 9 per cent. The highest she has heard of is 11.7 per cent. Many are trapped because they cannot remortgage with other lenders. Some are still in negative equity. Others have loans worth 90 per cent or more of their home’s value.

    The National Audit Office praised the 2015 sale of former Northern Rock loans, saying it achieved ‘value for money’ for the taxpayer. Only in passing did it mention that borrowers had been left with little protection, saying: ‘While the mortgages and loans are currently owned by FCA-licensed entities, they, like any UK mortgage, could be sold in the future to an entity which is not regulated and customers would need to seek redress under the Consumer Rights Act.’

    Not everyone will feel sympathy with mortgage prisoners. Perhaps it should have been obvious to any homebuyer that a 125 per cent mortgage was not a good idea. There were plenty of us writing about the lunacy of it at the time. Moreover, not all mortgage prisoners are paying rates that are exactly usurious — Neale herself has been paying 5.3 per cent, recently reduced to 4.39 per cent, on her interest-only former Northern Rock mortgage. True, homebuyers generally now pay a lot less than this, but I would have bitten the hand off a broker who offered me that rate when I bought my first home in 1993 (I started off paying 7.75 per cent).

    But then mortgage-lendingis, and was in the 2000s, a supposedly regulated industry. People who took out loans were under the illusion that there were rules to protect them; they might not have been aware that their loans could be sold on — and that they could end up owing money to some fly-by-night group of which they have never heard. Ronna Hoskins, who is paying 9.82 per cent on a loan she originally took out in 2007, says her lender went insolvent, only to be reborn with a slightly different name.

    The FCA recently put out a statement saying it had written to the lenders involved ‘reminding them of their obligation to treat customers fairly’. It added: ‘We will act where we see outlier rates and consider their practices to be unfair’ — but did not say how high an interest rate had to be before it became excessive.

    But why the need to sell Northern Rock loans to lenders who were obviously going to take advantage of the situation? Why couldn’t they have been bundled into RBS, which has remained a predominantly public-owned bank? The partial nationalisation of banks in 2008/09 was a huge missed opportunity. There was a chance to turn RBS and Northern Rock into state banks offering current accounts, savings accounts and mortgages — setting a basic standard in how to treat customers, against which the private sector was welcome to compete. Instead, there was an unseemly rush to flog off whatever bits and pieces the government could,  even at a hefty loss to the taxpayer.

    It would be nice to think the latest round of bailouts won’t end with the same perverse results as the last — but I wouldn’t bet the house on it.