Northern Rock said that it plans to increase mortgage lending by up to £14 billion ($20.4 billion) over the next two years.
A new business strategy has been agreed that will see around £5 billion of new mortgage lending for 2009 and between £3 and £9 billion from 2010 onwards, subject to market demand.
The announcement follows the U.K. finance minister Alistair Darling's statement of Jan. 19 where he announced a series of measures designed to reinforce the stability of the financial system, increase confidence and capacity to lend, and in turn to support the recovery of the economy. This included the announcement that Northern Rock would no longer actively pursue a policy of rapidly of reducing its mortgage book.
Northern Rock's new lending will be made on commercial terms to ensure that it represents good value for money for the taxpayer. It will allow Northern Rock to return to the mortgage market with a wide product range. To enable Northern Rock to focus on new lending, the company will be restructured so that the back book of mortgages is managed separately to its other business. The restructuring will be implemented subsequent to state aid approval.
The government has made clear that it wants to see a well-functioning mortgage market where lenders lend responsibly and borrowers have access to a wide range of mortgages that they can afford to repay. Government policy towards Northern Rock is a part of meeting these aims.
According to Barclays Capital, this new strategic change will have some effect on the CPR rates of Northern Rock's Granite master trust.
"While the policy of actively encouraging borrowers to remortgage away from NR led to very high CPR rates, we now expect these rates to fall as borrowers are likely to remain with Northern Rock and if suitable, revert to the standard variable rate (SVR) of the bank," analysts wrote.
A reduction of CPR rates is negative for all Granite bond holders as it increases extension risk, in particular for lower-rated notes.
If borrowers, opt against the SVR, and are able to refinance with Northern Rock, these mortgages would be treated as technical prepayments away from the trust and could offset each other to some extent.
"According to the December 2008 (prior to any strategy change) investor report, 98.25% of redemptions were actual prepayments away from NR rather than 'removals,' " analysts said. "We expect this figure to decrease and furthermore, we would expect CPR rates to reduce significantly from April onwards, with near 21% of the pool rolling off fixed rates between January and April 2009. Given the new announcement, fewer of these customers will refinance away from NR, but they would be removed from the pool if they changed products, thereby acting as a technical prepayment."