The Financial Times headline today (9/2/08) spotlights mortgage fraud. Which may be related to what Lord Patel discovered in a conversation with a long standing Asian Financial Wizard and friend at the gym.
In Jan - June 2007, 60% of his business was arranging mortgages with (mainly) Asian self employed businesmen mortgaging property with Northern Rock.
It worked like this. Mr Q is a prosperous self employed businessman and seeks capital to expand. Northern Rock intoduced a new principal and wizard wheeze for their mortgages to help such cash strapped souls, build business and pay handy fees to sales staff and agents and fund the bonuses of main board Directors whose salary and bonus was based on sales growth.
It also explains why sales increased in the first 6 months of 2007 and profits only rose 1%. (That they could fund and pay a rise in the divvy of 33% is another story) Note that the first starred feature of their Interim results on July 26th said ...
Record H1 gross lending of £19.3 billion - an increase of 30.5%, with record H1 net lending of £10.7 billion - an increase of 47.3%
and somewhat lower down and hidden away..
Statutory profit attributable to equity shareholders of £188.2 million, up by 0.2%
Hmmmmm. ?????? net lending up 47% and only a 0.2% increase in profits how so ?????
Mr Q has a house let us say with a valuation £800,000. He takes out a mortgage of say 75% , say £600,000, ( loans were not really considered below the magic £1/2 Mn.) A loan was arranged for £600K, based on self declared earnings.
As soon as the mortgage is provided it is immediately paid back less £1. This leaves Mr. Q with a facility of £600K which he can call down and a mortgage with a balance of £1 to pay. Mr Q has £599,999 available in total or part at any time by making a phone call and receiving funds in 3 working days.
My friend gets 0.85% for arranging what he describes, is, for his extensive clientele a "no brainer". Luvvly jubbly, trebles all round.
Any such loans of course fly right under the radar when audited - loans which exceed asset backing, or payment arrears. (e.g Northern Wreck Interim results - Credit quality remains robust. 0.47% of mortgage accounts 3 months or more in arrears (31 December 2006 - 0.42%) - around half of industry average )
Of course the first tricky bit is how all this (and my friend was handling £1 -2 Mn mortgages / loans a week) you deal with this on the balance sheet at Northern Rock.
The second tricky bit is how you find the funds, when ,let us say, every mortgagee decides to take up his "loan". This is why Old Adam Applegarth went to see the Bank of England on August 7/8/9 th ( less than 3 weeks after the half year results and issueing a 33% increased divvy!) asking for £30 Bn. as Lord King explained in his BBC4 Radio interview. The queues formed in the street when the , what we bankers call an , "empty till situation" arose and the word spread very, very, very quickly in the Geordie homeland of NR.
The third tricky bit is when someone discovers that these properties might possibly be slightly overvalued (or might not even exist) and the self declared income is probably somewhat lower than the mortgagee had anticipated.
The fourth tricky bit is when Mr Q disappears - or quelle horreur, doesn't seem to exist.
All this might explain why Mr Curran at Northern Wreck had such a bad headache it kept him off work until he decided (with some encouragement) to leave the company. It might also explain why there is so little enthusiasm by major players in resurrecting NR and why Mr O and his plas have politely withdrawn there declarations of interest.
However the gravy train rolls on, not quite at the same speed, with the same intensity (NR was writing 20% of all UK mortgages in the first 6 months of 2007) at the Halifax Bank with their Flexible Mortgage tailored to meet your "special" needs. Halifax are part of HBOS whose year end results are awaited. Shareholders are advised to bail out without delay. NOW..Pronto
Incidentally NR produced accounts in 26 days at the Interims .. it's February 9th and no sign of them .. the wel established rule that it takes a very, very long time to produce bad, very bad results.
Perhaps there is a clue in that the National Statistical Office maintains that the whole NR debacle should appear as a £100Bn. (ouch!!!) item on the Current borrowing requirement... somehwat slightly in excess of all the other magical figures previously published.
Curiously this note is added to their decision... just what does this mean ?
This decision also required ONS to examine the structures and arrangements used in Northern Rock plc’s borrowing programme, which involves securitisation of mortgage assets. The ONS judgement here is to also classify to the public sector the UK-resident special purpose vehicles used in the securitisation programme.
The ONS said its reclassification of Northern Rock was backdated to October 9 last year, when the Bank of England's support arrangements for the bank were amended to accept all of its assets as collaterol, including unsecured loans.