Moneyadviceforu

Hundreds of customers lined up to withdraw their savings from a British mortgage bank Saturday, ignoring government assurances that their money was safe despite the bank’s request for an emergency loan.Police were called in some cities to steer panicked crowds away as Northern Rock bank branches closed for the day.

Fears have spread over the bank’s request earlier in the week for an emergency Bank of England loan amid the global credit crisis. Northern Rock, Britain’s fifth-largest mortgage lender, is the first British bank in 15 years to be bailed out by regulators.

Customers withdrew $2 billion from the bank Friday, The Financial Times reported, citing an unidentified person described as close to the situation. The bank declined to confirm the figure, which represents 4 percent of its deposit base.

Treasury chief Alistair Darling and the country’s Financial Service Authority tried to assure customers there was no doubt over Northern Rock’s solvency.

The authority “has reiterated yet again tonight that it is satisfied that Northern Rock is solvent, can carry on doing business and, crucially, paying out money if people want to withdraw their funds,” Darling said on Channel 4 TV on Saturday night.

But The Sunday Telegraph said Northern Rock was preparing itself for a sell-off. Quoting unidentified sources, the paper said one plan would divide the bank’s mortgage portfolio between other major banks in what would be a private-sector rescue of the lender.

The bank made the loan request Thursday because it relies heavily on wholesale money markets for cash, and had been unable to borrow the amounts it required from other banks since the money markets choked up last month. That was caused in part by U.S. banks making mortgage loans to Americans with poor credit histories.

Although Northern Rock requested substantial emergency funds at a penalty rate, the bank has said it had billions of pounds in cash at its disposal. It has yet to draw on any emergency funding.

Despite Darling’s message, lines stretched around the block Saturday at some of the bank’s 76 branches in Britain and the bank extended opening hours to deal with the situation.

“Yes, we are making matters worse, but I do think people need some reassurance from Northern Rock and the government and financial services that their money is safe,” account holder Jane Taylor told Sky News while waiting outside a branch in Kingston-upon-Thames, west of London.

But others said they had faith in the bank and financial authorities and watched the lines in disbelief.

“It’s mostly, in my opinion, ignorance and that’s why they’re panicking,” said another bank customer who gave only his first name, Tom. “I’m leaving mine there.”

Under Financial Services Compensation Scheme, deposits of up to $63,900 are guaranteed should a bank default.

Ron Stout, a spokesman for Northern Rock, told The Associated Press that reckless comments by some analysts about the bank’s solvency prompted customers to panic and line up outside branches or strain the company’s online banking system.

He said Northern Rock would continue to extend its banking hours, by opening one hour ahead of schedule on Monday, and to reassure customers that their investments are safe with the bank.

Northern Rock’s crisis is just the latest indication that the easy credit conditions of the past decade may have come to an end for homebuyers.

The group had ramped up its mortgage lending in recent months. For example, it was one of the pioneers of lending first-time buyers more than the value of their houses – up to 125 per cent – through its “Together” product.

Many lenders are still reliant on funding through “retail” deposits from customers but others, such as Northern Rock, depend on a functioning bond market to sell on their mortgages to institutional investors.

Halifax and Abbey have both nudged up the rates on some of their variable tracker deals by 20 basis points this week. Norwich & Peterborough Building Society has cut its maximum loan to value ratio from 100 per cent to 90 per cent.

Most experts believe that lending criteria, by Northern Rock and its peers, will become even more strict, given the prevailing mood of uncertainty. That can hardly fail to feed back into the strength of the housing market itself.

The housing boom that began in 1995, two years before Tony Blair came to power, was founded mainly on an availability of cheap debt rarely seen in previous decades. Not only were interest rates low by historic standards, hitting a trough of 3.5 per cent in 2003, but as prices rose, year in and year out, lenders began to relax their criteria as they jostled for market share. This was the era of unparalleled latitude when it came to mortgage lending.

First-time buyers were offered mortgages of up to 125 per cent loan-to-value.

Landlords were able to take out multiple buy-to-let loans where net rents did not even have to cover interest costs, in contrast to previous practice.

With house prices continuing to increase – even now they remain about 10 per cent higher than this time last year – there were few negative repercussions.

Defaults and repossessions have more than doubled since their low point in 2004 but are still way below their level during the last recession of the early 1990s.

Yet house prices are now looking more vulnerable to a correction.

A survey from the Royal Institution of Chartered Surveyors this week was the most pessimistic for two years. Property agents seeing price falls outnumbered those reporting gains by 1.8 per cent, it said.

And yesterday’s September survey from Rightmove suggested asking prices had fallen by 2.6 per cent across the country when compared with August.

Sentiment has been hit in London, in particular, by fears that end-of-year bonuses in the City will be much smaller than last year.

“Confidence is very important to the housing market, especially in central London, it has become so hot, pricing was so far ahead of itself, it was at unsustainable levels,” said Richard Donnell, head of research at Hometrack, the property information group.

“The gap between asking prices and achievable prices could be quite sizeable over the next few months.”

Victoria Mortgage Funding, a specialist sub-prime mortgage lender, has called in the administrators, becoming the first UK company to fail because of the global credit crisis.

KPMG took control of the group yesterday after it was unable to secure financing to continue operating.

Victoria operated by originating loans for risky borrowers, which it would then bundle and sell on to other investors.

That model has become virtually impossible amid the meltdown in global markets as institutions once eager to buy packages of loans have now turned their back on such securities.

America’s largest lender, Countrywide, said last week that it would slash 12,000 jobs, the latest of several major US groups to be hit by the crisis. Yet Victoria is the first in the UK to run aground.

The London-based company has a book of more than 1,700 residential loans worth £300m.

It did not offer loans directly to customers, but rather though brokers and individual financial advisers. It has another 381 mortgages in process, which rival GMAC-RFC said that it will review over the next three days.

A KPMG spokesman said it was still too early to tell what the final outcome will be for Victoria.

“It is very early days yet. We have to get underneath the bonnet and find out what the situation really is,” he said.

Earlier this year, Victoria sold a loan book made up of more than 3,500 mortgages worth £500m into the debt markets. That was before the global credit crunch took hold this summer.

Spurred by a spike in defaults in America on sub-prime loans that had been granted to borrowers and then been sliced and diced into bonds sold to hedge funds and institutions, the credit markets ground to a halt as the extent of non-payments grew.

Victoria was started two years ago with the backing of Venturion Capital, a New York venture capital group.

Borrowers are facing tougher credit checks as lenders try to minimise the risk of defaults following August’s market turmoil.

Subprime mortgage lenders have been quick to raise interest rates in recent weeks and, while rates for mainstream borrowers have remained largely unchanged, many banks and building societies have tightened lending criteria.

That could mean limited access to credit for first-time buyers, homeowners seeking to remortgage and consumers hoping to take out credit cards and loans.

Jill Stevens, the director of consumer affairs at Experian, the credit ratings agency, said: “We are seeing a tightening up across the board on lending. Lenders realise there are lessons to be learnt from the US subprime mortgage market.”

Lenders are looking more closely at borrowers’ credit histories, any other outstanding debt and their level of disposable income, according to mortgage brokers and credit agencies.

Minor blemishes to a borrower’s credit rating – such as a missed payment on a mobile-phone account – are now being taken more seriously.

“Lenders are looking deeper into people’s credit histories,” said Neil Munroe, director of external affairs at Equifax, another credit agency. “They will be looking in more detail for early warning signs of how borrowers deal with credit.” Agencies believe that lenders are now more interested in how borrowers service their debt than simply whether they have kept up with payments in the past. Ms Stevens said lenders were looking more frequently at whether borrowers had paid back just the minimum monthly amount or the full balance on existing credit accounts.

Banks are likely to impose the toughest checks on mortgage lending, due to the significantly larger loan sizes involved. Borrowers taking out riskier mortgages – typically those with higher loan-to-values – are likely to come under the most scrutiny.

Mortgage brokers say lenders are unlikely formally to restrict how much people can borrow as a proportion of a property’s value or a multiple of their earnings. But they can make subtle changes to how they assess applicants’ credit scores without public fanfare.

Simon Tyler, of the broker Chase De Vere Mortgage Management, said another area in which banks were likely to take a tougher stance was self-certification mortgages. These allow borrowers to state their incomes without formal proof.

Mr Tyler said: “Lenders may well ask more probing questions about income levels, which could make it harder for people to get larger loans or remortgage.”

Banks are also becoming stricter when lending to those with little or no deposit. This week, the Leeds Building Society said it would lend 100 per cent of a property’s value only if the borrower had a guarantor, such as a parent, to back repayments.

So far, lenders have not generally passed on higher borrowing costs to mainstream borrowers. Some fixed rates have, in fact, fallen in the past month to reflect a more stable base-rate environment. But if the banks’ borrowing costs continue to rise, brokers believe that mainstream mortgage rates may not be far behind.

Money advice