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Northern Rock withdraws from sub-prime mortgages

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by Kay Mitchell

Ron Sandler, who has been placed in charge of crisis-torn Northern Rock, recently set the Rock’s new mortgage rates at uncompetitive levels, in a conscious effort to drive away new business.

Northern Rock has now announced it is exiting from Britain’s sub-prime mortgage market. The retreat from low-income home loans, which Northern Rock arranged on behalf of Lehman Brothers 12 months ago, is the biggest strategic shift since the bank was nationalised last month.

It is believed further measures are likely to be announced by Mr Sandler, the former Lloyds of London boss, such as job losses and the reduction of the Rock’s £100 billion-plus mortgage book.

According to New Star’s economist Simon Ward, should Sandler withdraw fully from the sharp end of the market, the bank may be able to repay the majority of its £25 billion emergency loan by the end of the year,

Mr Ward added with this likely to be ‘ negligible’ in 2008, the bank could pull in some £13 billion from customers who repay their loans and move on to another lender.

Furthermore, the Northern Rock’s Government guarantee and its generous savings rates could boost its deposit base by a further £10 billion. This would leave Northern Rock just £2 billion short of the estimated £25 billion Bank of England loan, added Mr Ward.

However, new boss Sandler may decide against paying-back the Government, which provides cheaper funding than Northern Rock would get in wholesale money markets.

Mr Sandler is preparing a business plan for the publicly-owned mortgage lender, which he is expected to hand over to the Treasury by the weekend.

It was announced last week that one of Northern Rock’s biggest shareholders threatened to commence legal action against the crisis-torn bank.

Jon Wood, the fund-manager behind SRM Global with a 12% stake in Northern Rock, was reported to have said we are expecting to file legal action by the end of the week.

SRM, together with RAB Capital, the bank’s two largest shareholders, face combined losses of approximately £170 million following the nationalisation.

After rejecting takeover bids from the board of Northern Rock and a consortium led by Sir Richard Branson’s Virgin Group, the Government rushed through legislation to nationalise Northern Rock last month.

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News posted: March 12, 2008

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