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The focus is once again back onto the UK’s third biggest mortgage lender – in terms of gross mortgage lending – Northern Rock.

The poor guys up in Newcastle must be wiping the sweat from their brow today and praying that the current market turmoil comes to an end very shortly.

The lender has become the first high profile victim of the current liquidity squeeze occurring in the global markets and has had to ask the Bank of England to provide it with emergency funding in order to support it in this difficult period.

Shares in the lender have plummeted by as much as 24 per cent after the decision was confirmed last night.

Northern Rock has seeked to calm market as well as consumer fears that it is not on the verge of going bust by issuing a stock exchange announcement earlier today.

It says that if the current market conditions remain until the end of 2007 it expects underlying profit before tax for 2007 to be around £500m to £540m, compared to £588m in 2006.

The announcement also included information on the credit quality of its loan books. Northern Rock says that 3 months plus arrears in the residential book were 0.47 per cent at the end of August, still under half the industry average, and 1.21 per cent on the standalone unsecured book. Three months plus arrears on the Together secured book were 0.86 per cent at the end of August.

Northern Rock wants to stress to the market that it is only facing a funding issue at the moment and that its problems are not to do with lending quality.

The Council of Mortgage Lenders was also keen to stress this point with a statement from director general Michael Coogan saying that consumers need to understand that the problem for lenders generally at the moment is in raising funds, not in lending quality.

But it is clear that Northern Rock will face a high degree of brand damage because of this move. There are reports emerging in the media that Northern Rock customers are already queuing in droves outside their branches in order to draw out their savings.

As Robert Sterling managing director Kevin Duffy says there is a real danger that both the industry and consumers grossly over react to what is happening to Northern Rock.

“The fundamental’s of the UK mortgage market remain wholly sound. As for Northern Rock itself, it maintains a solid and robust balance sheet which bears no relation to the knee jerk hysteria which we’re seeing in certain parts of the media.”

But uncertainty still continues to remain at large in the market with many commentators calling for banks to come forward and state how much bad debt they are holding. Whilst Northern Rock and Alliance & Leicester have made moves to do this, a lot of banks still have not followed suit. This could be because they themselves are not clear on how much bad debt they have but until this happens, the current market turmoil is likely to continue to roll on.


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