by Mark Johnston
Is Northern Rock to be a Part of Help to Buy Scheme.
Northern Rock is well known as one of the main drivers that caused the recent recession during 2008 in the UK.
Therefore at the start of the financial crisis in 2008 Northern Rock was rescued by the UK tax payer.
The bank was then split in to the Northern Rock PLC, which resumed lending and was then sold on to Virgin Money.
The National Audit Office said however that tax payers lost around £480 million on the sale of Northern Rock PLC.
The other half was then Northern Rock Asset Management, the ‘bad bank’ which remains in public hands but is managed by UK Asset Resolution Limited (UKAR).
The bad bank was created to house and manage the bad debts, which are largely from defaulted mortgage loans.
UK Asset Resolution Limited (UKAR), which holds the toxic assets of former lender Northern Rock repaid £4 billion to tax payers during 2012, this figure was considerably up on 2011s repayment of £2.8 billion.
Richard Pym, UK Asset Resolution Limited (UKAR) chairman, said “when we launched UKAR in 2010 we owed HM treasury £48.7 billion and by the end of 2012 that had reduced to £43.4 billion. We still have a long way to go but it remains our expectation and determination to repay that debt in full”.
The new help to buy scheme is intended to support borrowers who would otherwise fall in their attempts to get a mortgage, according to the government.
It seems then that George Osborne, the chancellor of the Exchequer, is considering using both the Northern Rock and Bradford and Bingley to house the governments liabilities under the help to buy scheme.
Although the Treasury said “we have not yet decided who will be the scheme administrator. This is an issue that that will be resolved as we work through the details of the scheme”.
A UK Asset Resolution Limited (UKAR) spokesman, added “we can not speculate on what the government may or may not do”.
Some industry insiders feel that when the support for this scheme is withdrawn, in just 3 years, house prices will fall and this will probably come at about the same time as a rise in the interest rate.
Therefore a negative equity trap is the obvious danger and the banks and the government that encouraged them in to riskier lending will be left with possibly thousands of under performing loans.
So it appears that some experts therefore believe that it is ironical that the government are considering the ‘bad’ part of Northern Rock in which to house their loans.
Erik Britton of the economists Fathom Consulting, says “government backed mortgages risk sparking the same pre-2008 behaviours”.
The government does however insist that the borrowers this scheme will help are not ‘sub prime’.
The Chancellor has said that the government would not put the tax payer at risk by letting people borrow more than the value of their property. He also added that he did not want to return to the days of 125 per cent Northern Rock Mortgages.
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