125% LTV to blame for Rock arrears

At the Treasury Select Committee last week, Gary Hoffman, chief executive of Northern Rock, told MPs that 66% of its repossessions and half of its arrears are due to its Together range of mortgages.

Northern Rock had 4.11% of its borrowers three months in arrears at the end of September 2009, well above the industry average of 2.5%, but Hoffmann said the bank has been working hard to keep them in their properties.

He told the Committee that the arrears stabilised in the second half of 2008, and that all the cases are now held in its ‘bad bank’, Northern Rock Asset Management (NRAM).

In his evidence, Hoffman told MPs: “I need to be clear that we would expect arrears to be that high given what the book is.”

Hoffman, who promised that Northern Rock’s performance in 2009 would be substantially better than the £1.4bn loss in 2008, also said it could take up to 20 years to clear NRAM ’s mortgage book and repay the Government loan. He said the bank is on the right trajectory after being recapitalised and split into two divisions.

David Hollingworth, head of communications at London & Country, said the product was high risk and he was not surprised that it had led to such high arrears.

He added: “The product was successful for Northern Rock in terms of sales and enables some borrowers to get on the ladder sooner than they might have been able to. In hindsight though, the
bank may have got carried away with their exposure to the product, but borrowers should have
understood the risks involved.”

Simon Webster, managing director of Kent-based broker Facts & Figures, added: “There is nothing
fundamentally wrong with 125% mortgages, but it seems the correct underwriting on cases must
not have been done, because it was sold to people who struggled when the recession hit.”