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Ailing lender still offering high risk loans - but customers stay away!

Northern Rock is struggling to win new mortgage business despite refusing to scrap its high risk lending rules that allow home buyers to borrow up to six times their annual income. Mortgage brokers said the ailing Newcastle-based bank also continued to sell its controversial Together package that offers a 125% mortgage and personal loan package.

Most lenders have tightened their lending rules in the aftermath of Northern Rock's bailout by the government more than a fortnight ago. Sub-prime lenders that target home buyers with poor credit histories have scrapped much of their riskier lending in recent days while most mainstream banks and building societies have targeted safer customers with higher credit scores.

One broker said he believed the bank would need to maintain its high lending multiples "to offset the damage done to its brand and the higher rates on its previously best-selling products".

Northern Rock sales staff can sanction mortgage offers of more than five times earnings to customers with salaries of £100,000 or more. If the customer agrees to a five-year fixed rate deal they can qualify for a loan worth six times their income, said mortgage broker London & Country.

Northern Rock's shares dropped 7% to 179p yesterday on news that its overdraft with the Bank of England had ballooned to almost £8bn. Some experts said it could be expected to breach the £10bn barrier within days.

A combination of mortgage sales before its near collapse and the need to refinance its existing book of mortgages is expected to force the company to seek significant extra funds from the Bank of England.

The rescue package offered by the central bank will operate as long as Northern Rock needs the funds. Governor Mervyn King has so far declined to publish details of the rescue package for "operational reasons".

IKB, the German lender to medium-sized firms that was rescued last month from collapse by the state and other banks, yesterday reported a two-thirds slump in first-quarter operating profits and warned again its full-year losses could be as much as €700m (£488m) because of its exposure to the sub-prime crisis.

The Düsseldorf-based bank underlined the scale of its own crisis by saying that operating earnings plunged by 66% from €54m to €18.4m in the three months to June 30 - before the sub-prime crisis erupted. It blamed the drop on increased losses (€43m) on net income from financial instruments at fair value. IKB was rescued with an €8bn cash injection from the state-owned KfW bank and others.

He added: "Without a detailed understanding of exactly how much they owe and what rates they are paying, it is easy to see how the situation could spiral out of control."

Source: business.guardian.co.uk

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