Northern Rock Shareholders’ Meeting Set For 15 January

Northern Rock hoped to conclude their sale before Christmas, but as that have proven impossible, the bank has agreed to hold an emergency shareholders’ meeting on 15 January to discuss the sales process. This will be the first real opportunity for shareholders to confront the bank’s management since it hit the buffers in September.

Two major shareholders of the bank want to restrict its ability to sell assets or issue new shares, so it could be a fiery meeting.

The bank came in for criticism last week when it came to light that it had wrongly told borrowers that mortgage payments had become overdue.

The extraordinary meeting was requested by hedge funds RAB Capital and SRM Global – who hold 16% of the shares between them - and the bank responded by saying that the proposed resolution would not help the rescue of the bank. They have proposed that shareholders have the power to block any move by the bank to sell 5% of its assets, buy assets or make large issues of new shares.

Chairman Bryan Sanderson wants the proposals voted out. He said: “I believe that these resolutions are unnecessary and, in view of the difficult and challenging circumstances currently affecting the company, potentially damaging.”

At the moment a Virgin Group consortium and investment group Olivant are the two potential buyers for the bank.

Northern Rock came under fire from its mortgage holders when standing order payers were requested to make their monthly payment as soon as possible. The letters were sent early to avoid December postal delays, but the bank denied it was trying to get customers to pay more than they normally should by mistakenly paying twice.

The bank said that the letter clearly stated that it should be ignore if a recent payment had been made or arrangements were in place, but did admit that it had been sent to all standing order customers whose payments would be made automatically in any case

The FSA’s First Ten Years

The Financial Services Authority is ten years old, and when it was first set up it was said that it was not created to ensure that no firm would ever go bust, and inevitably there would be the occasional regulatory failure.

First chairman Howard Davies said that its real ability would be to bring about some unlikely rescues from time to time. It might be likened, he said, to a goalkeeper – the last line of defence. His fear was for a major financial crisis in the first few years before people had time to understand the FSA’s true benefits. The FSA has come through the dot-com boom and bust, the millennium bug and the bear market, but the worst moment came with criticism for the collapse of split-capital investment trusts, although in fact regulation of trusts was not part of the FSA’s mandate.

The biggest problem for the FSA has surely been the recent Northern Rock crisis, and, bad though it has been, one major failure in ten years has not been a disastrous record.

The Government has pressed the FSA to introduce tougher rules for banks, though such regulation would probably come too late to save Northern Rock and any other bank in real trouble in the current credit crisis. Those problems were caused some years ago, and the people in charge at those banks should know what action they need to take right now.

Hastily passed regulation does not always work in reaction to crises and does not usually provide a forecast for the next bad situation. Proportionate risk-based regulation is one of the key attractions of the City compared with rival financial centres. A measured approach is better than panic-reaction and the FSA has proved to be a fairly reliable defence against financial problems in its first ten years.

Four Rate Cuts For 2008 As House Prices Fall Again

Experts are now suggesting that there could be as many as four interest rate cuts in 2008 as the Bank of England tries to steer the UK economy away from recession.

The first cut of the year could come as early as the second week in the New Year, following the cut in December which took the rate down to 5.55%.

If there were to be four cuts in 2008 the rate would come down to 4.5% which would be warmly welcomed by the UK’s homeowners who have struggled with rising mortgage rates on the back of interest rates that have gone up from 4.5% in August 2006 to 5.75% in July 2007.

Reports from the Centre for Economics and Business Research (CEBR), and BNP Paribas bank make these predictions, believing that poor economic growth (expected to be 1.6% in 2008) could force the bank into cuts.

The CEBR’s Richard Snook said: “So far only the housing and financial markets have weakened significantly as a result of the credit crunch. However, we expect the flow of negative economic data to become more pervasive – supporting further action by the Bank.”

Meanwhile, Hometrack’s latest house price figures show a fall for the third consecutive month, dropping 0.3% from November to December – the largest monthly fall since January 2005. This means that the annual house price inflation figure is down to 3%, with agencies reporting figures going down in three out of ten regions of the country.

Hometrack research director Richard Donnell said: “The greatest turnaround in market conditions has been seen in southern England where the market is slowing off a high base. Many would-be buyers have stepped back from the market and the greatest short term casualty has been lower levels of market activity with sales volumes down by 18% over the last 6 months.”

Wholesale Money Market Rates On The Rise Again

The wholesale money market in the UK is in a state of stagnation as banks try to protect their cash in the run up to the New Year reporting period.

The one month Libor rate – which banks use to lend money to each other was up by 0.63% on Monday to 6.72% - a nine year high. The three month rate was up to 6.62%, making money market conditions their worst since the credit crunch first started to take its grip on 9 August.

Central banks in London, Frankfurt and Washington fought desperately to stave off the rises by injecting cash into the system, but to no avail. This is bad news for borrowers as these rates will have a direct and adverse impact on mortgage and loan rates.

These rising rates will bring even more pressure to bear on the Bank of England to cut the base rate from 5.75% this week. Nevertheless, members of the Monetary Policy Committee have made it clear in the past two weeks that their primary concern is to keep inflation under control, and that has been rising, and with oil and food prices on the rise, November’s consumer price index figure is likely to be higher than October’s 2.1%.

Jonathan Loynes of Capital Economics said: “Banks are scrambling for funds to get safely through to the end of the year. Outside the one-month rate, the three-month rates have been creeping up again over last few weeks. There was a period where it looked as if we were through the worst, but the mood seems to have turned more pessimistic again. It seems to be a reflection of continued liquidity problems. It makes it more urgent that the Bank of England cuts rates. Whether or not they cut this week or not is still very unclear.”

Government Figures Confirm House Price Slowdown

The latest house price data shows the merest increase in prices. The report by the Department for Communities showed that an average home in the UK rose in price by just £220 in October, to £220,195. This represents an increase of just 0.1%.

Although these figures are slightly out of date compared with others from Nationwide and Halifax, they certainly support figures which show a slowdown in the market. Halifax’s most recent figures showed a fall by 1.1% in November, after a 0.6% drop in October. Nationwide’s figures for November showed a 0.8% fall – the biggest drop it had recorded in 12 years.

According to the Government figures, the average price of a flat was down by 0.7% in October; terraced housed were down by 0.4%. Conversely, detached homes experiences a 0.8% rise in prices.

Interestingly, despite the minimal growth, annual house price inflation was up to 11.3% in October, from 10.8% in September. The reason for this was that the 0.1% growth replaced a fall of 0.4% for October 2006.

Chief UK and European economist at Global Insight, Howard Archer, said: “While modest annual falls in house prices are highly possible in 2008 and prices seem set to remain pressurised for an extended period, at this stage we do not expect to see a sharp correction. We believe that the downside for house prices will be limited by a lack of supply, the increasing number of households, high employment and the fact that few vendors are currently having to sell for ‘distressed’ reasons.”

The latest figures showed that annual growth is now lowest in the North East at only 5.25%. The East Midlands currently has 6.4% growth and both regions are on the slide. Although Northern Ireland saw a slip in annual inflation, it sill leads the way in the UK at 32.5%. London is next with growth of 17.7% for the year, actually up on September (16.5%).

Rates Set To Continue Going Down

The reduction of the base rate by the Bank of England came after a whirlwind week after which it became almost inevitable that the Bank would have to reduce the rate or risk severe damage to the UK economy. Just a few days earlier the popular prediction was for rates to remain unchanged until spring was just around the corner, but the cut same sooner than Christmas in an attempt to re-ignite the stagnating retail and housing markets.

So, where next and how soon for the base rate? Here are some thoughts of the experts.

Howard Archer at City research firm Global Insight said: “We expect the Bank of England to enact two further 25 basis point cuts in interest rates during the first half of 2008, taking them down to 5% by mid-year. This reflects our belief that UK growth will slow markedly over the coming months and will average just 1.9% in 2008. Slowing growth should increasingly dilute underlying inflationary pressures.”

Economic adviser to Deloitte & Touche, Roger Bootle, said: “I previously thought that rates would drop to 5%, but I now think that they could eventually be cut all the way to 4%.” He added: “I doubt that the MPC will hold off from cutting rates again for long. After all, the slowdown in economic activity that is well underway will go some way to containing price pressures. I think there is a good chance that interest rates will be cut again in February. And if the financial market turmoil continues, a move in January would not be out of the question.”

George Buckley at Deutsche Bank said: “Not surprisingly, the statement accompanying the decision highlights the growing downside risks to growth and the role the credit crisis is playing. Near term at least, they will continue to watch CPI [inflation] closely, but slower growth is expected to dampen inflation ahead. We expect rates now to fall to 5% by mid 2008.”

David Brown at Bear Stearns said: “The Bank of England has pulled the rip-cord to much lower rates. We could well be staring into the jaws of UK rates coming down to 4% in this cycle.” He went on: “We expect another cut in January, with rates to target 5% by the second quarter.

UK rates should be at 4.5% by the end of 2008, possibly even lower if the downturn is more severe. This has been a cut to alleviate the credit crunch and provide a rescue remedy for growth. Lower rates should help to put a prop under the UK housing market.

Halifax and Nationwide Pass On Rate Cut

It is not the kind of news we expect to hear, but at last there is some good news for weary mortgage borrowers. Not only did the Bank of England reduce the base rate by a quarter of a percent to 5.5% on Thursday, but mortgage giants Halifax and Nationwide both said that they would be passing on the whole cut.

Straight after the Bank announced the cut in the base rate, both mortgage lenders announced that they would be making the same 0.25% cut to their standard variable rates from 1 January 2008.

The announcements come as a welcome surprise as most people felt that mortgage lenders would delay, hold back some of the cut, or do both in an attempt to hold on to some cash in these days of banks’ cash shortages in the global credit crunch.

With two of the biggest mortgage lenders passing on the whole cut, it will bring pressure to bear on other lenders to do the same with their own mortgage rates.

Halifax will cut its SVR to 7.5%, and Nationwide’s will be reduce to 6.99%, taking about £16 of an average £100,000 mortgage. Payments will change from £755.32 to £738.99 with the new rate of 7.5%. First-time buyers will also see a glimmer of hope for their chances of buying a home, as payments will fall by around £20 for a new mortgage of £120,000.

People moving home, who typically borrow about £140,000, will see payments go down by around £23 a month to about £1,035 and anyone with a big mortgage of £250,000 will see their repayments reduced by over £40 a month.

Other than these two, lenders were more cautious in announcing new rates. No other decisions were announced, with all the major banks saying that mortgage rates were under review

Lloyds TSB Feels The Crunch

Lloyds TSB has admitted to a credit crunch exposure of £200m, which may seem huge, but is less than that of banking rivals Barclays and Royal Bank of Scotland. Lloyds expects is underlying profits to be in line with expectations.

Lloyds TSB, the UK’s fifth largest bank, said that it had limited its losses and remained firmly on track to deliver a solid performance for the year.

Swiss investment banking giant UBS felt the impact much more sharply, writing off another £5bn of investments connected to high-risk US home loans. The bank warned that I might suffer an overall loss for the year.

The £200m of writedowns by Lloyds encompasses an array of financial packages. Examples are a £90m exposure to Cancara, a ‘conduit’ company through which Lloyds raised short-term funds; an £89 exposure to mortgage-backed bonds; a £22m loss in structured investment vehicles.

Lloyds claimed that its operations has benefited from tighter mortgage controls, and has continued to grow its current account share of the market and has seen deposits increase. Another increase to its funds came from the sale of such businesses as Abbey Life which it sold for £977m to Deutsche Bank in July.

Chief executive Eric Daniels said: “Whilst no bank has been immune from the recent turbulence, the relatively limited impact of the market dislocation on the group has been more than offset by the significant profit on the sales of non-core businesses.”

There will also be an adverse effect on Lloyds TSB’s profits by its repayments on overdraft charges to customers. These cost it £36m in June, and a similar charge is anticipated in the second half of the year. Insurance claims from the flood problems in the June and July are also expected to hit the bank – to the tune of around £110m

Not Enough HIPs Work To Go Round

Home Information Packs (HIPs) have not proved very popular since their introduction at the beginning of August. Initially in place for homes with four bedrooms or more, home with three bedrooms were added to the scheme on 10 September. It was said by those in the industry that people rushed to put their homes on the market before HIP implementation and have been reluctant to do so since.

This theory is being backed by newly qualified energy assessors who are saying that there are too few homes coming onto the market for them to make a living. There are now nearly 5,000 people who have qualified as home energy inspectors, and they say there is not enough work to go round.

Many were lured onto training courses in the expectation of regular work being supplied. Inspectors were told that they could earn £100 for each home visit, but it is working out at more like £40 to £65.

The job of energy assessors is to produce energy performance certificates for homes as an integral part of the government’s HIP scheme.

Government hopes that the scheme would have filtered down to two and one bedroom properties by now have been dashed, but that is to the relief of estate agents and others in the industry.

Energy assessor Chris Evans was unhappy with training companies who had made inflated claims of what assessors could earn. He said: “They are bringing people into their training courses with claims of earnings of £65,000 to £100,000 a year. For 99.9% of qualified assessors out there, this is so far removed from the truth.”

The next few months are expected to see a further 10,000 people qualify as inspectors.

David Thompson of the Institute of Domestic Energy Assessors says the amount of work available is negligible. He commented: “It’s quite clear… there are far too many people now qualified to become home inspectors and energy assessors compared to the government’s statistics of what they need.

Land Registry Sees House Prices Nudge Upwards

The latest figures on house prices come from the Land Registry, generally thought to be accurate, but a little out of date. They show that house prices crept upwards, by just 0.1%, in October. In London, where house prices have steamed ahead for most of the year, prices dipped by just over £2,000.

The small rise in prices across the country is seen as more evidence that the property market is definitely slowing down.

The average cost of a home in England and Wales is now £184,346, with annual house price inflation at 8.1%. The 0.1% rise was well below the average for the past 12 months of 0.7%, and annual inflation had been 8.7% in September.

London, having seen the biggest rises for many months, saw the biggest fall in prices in October, with the average cost of a home falling by £2,100 or 0.6%. Nevertheless, London still tops the house price league, with its average house price for October 2007 at £351,039 whereas the average price for England and Wales is £184,346. Wales was the region with the biggest price rise in October, seeing a 2% monthly increase to an average price of £143,649.

A number of reasons have combined to bring the market to a virtual standstill. The actual high prices of houses, the rising cost of mortgages and concerns about the health of the wider economy are among them.

Other reports that show prices falling in October came from Halifax and Hometrack, to support the slowdown theory.

Chief economist at Global Insight, Howard Archer, said: “’Evidence is mounting that the housing market is now cooling significantly in the face of tighter lending practices and the heightened affordability pressure on house buyers coming from higher interest rates, elevated house prices and muted real disposable income growth.” He went on to say: “We expect annual house price inflation to fall back markedly over the next few months. Further out, we think it is most likely that house prices will essentially flatline for an extended period.

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