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Silver lining if property market averts a meltdown

The nationalisation of Northern Rock will be great news for taxpayers unless there is a housing market meltdown, says New Star economist Simon Ward.

He says despite media attention on negative outcomes, nationalisation provides a silver lining as long as the Government avoids making significant compensation payments to equity and subordinateddebtholders.

Ward considers that that the asset-related aim is to shrink the mortgage book, allowing early repayment of the Bank of England loan. He says new lending will be negligible and mortgage rates will be raised to encourage existing borrowers to refinance elsewhere. He says the main concern is that housing market weakness, coupled with possible negative effects from public ownership, could lead to significant default losses.

He says despite Treasury guarantees, Rock has been forced to offer high initial rates to retain its retail deposit base.

Ward says: “In the hous-ing recession of the early 1990s, repossessions nationally reached a peak of 0.77 per centof outstanding mortgagesin 1991.

“Assume that Northern Rock is forced to foreclose on 1 per cent of its loans each year for three years and achieves a recovery rate of only 70 per cent. Based on a 97bn book, this would imply a loss of 850m-900m, of which about 150m might fall on holders of securitised notes.

“Northern Rock’s sharehol-der funds stood at 2.3bn at June 30, 2007. Even assuming significant erosion since, the remaining equity in the business should easily absorb any losses, barring an Armageddon scenario for the housing market.”

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