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Northern Rock and HSBC – a match made in heaven?

What a week it has been for the UK’s third biggest lender, Northern Rock. It has been at the centre of media focus with take-over speculation looming over its head.

Whilst ING Group was the first name in the frame, the suggestion from stockbroker Cazenove that HSBC may swoop makes a lot more sense.

Money Marketing wrote a story in July that HSBC was considering launching at intermediary mortgage arm, becoming the last big bank to open up its mortgages to brokers.

Although speculation has been rife in the market over the years that the bank could make the move into the intermediary mortgage market, the fall in its market share of gross mortgage lending to 3.6 per cent in 2006 could be a sign that HSBC will make this move soon.

So buying Northern Rock would make a lot of sense for the bank, providing it instantaneously with a route to the broker market.

John Charcol senior technical manager Ray Boulger agrees that there would definitely be some logic in the move and that HSBC would certainly have the fire-power to do it.

Reports have suggested that Northern Rock is valued at little over £3bn which would be easy money for a banking giant such as HSBC. Analysts at Cazenove certainly think that Northern Rock would be a good fit for HSBC, especially after ING Group denied that it was in the frame.

Sticking with Northern Rock, the lender announced on Thursday that it will be following other lenders by increasing its sub-prime fixed rate products by up to 1.25 per cent from August 29.

In an email to brokers it also confirmed it would be withdrawing all of its sub-prime tracker products from the market until further notice and reducing its proc fees for its niche prime and light adverse product categories to 0.75 per cent.

The news this week that Lehman Brothers will be closing its US sub-prime subsidiary BNC Mortgage, shedding 1,200 jobs across 23 US locations, could possibly have played a part in Northern Rock’s decision to increase rates due to it selling its specialist loans on completion to Lehman. Whether Alliance & Leicester, who has a similar arrangement, will have similar problems remains to be seen.

And finally, Northern Rock attempted to allay investors’ fears over its exposure to the US sub-prime crisis on Monday. In a statement to the stock market, Northern Rock says its total investment in US collateralised debt obligations and mortgage-backed securities represent just 0.24 per cent of its total reported assets of £113bn. It says it has £200m exposure to US CDOs and £75m to MBSs.

The next couple of months will certainly be interesting in regards to Northern Rock and its future. I’m sure all of those in the mortgage market – lenders and brokers alike – will be keeping a close eye on what lies ahead for the Newcastle-based lender and the sub-prime market as a whole.

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