Northern Rock nonsense: deconstructing demonisation

OK, I know I said I wasn’t going to write any more about the Rock.

But this story in Saturday’s Guardian Money section has been bothering me all weekend.

I read the Guardian because, like at least some of the people who write it, I believe in a fairer world, with a great deal less inequality. Maybe it’s incipient middle-age, but it’s becoming increasingly apparent to me that, whereas I live in a world where the economy is based on people buying and selling goods and services, in short, on markets, this is not the case on Planet Guardian. Yes, across vast distances of time and space, in this strange and wonderful world, under the rose-tinted light of a gentle star, people seriously believe that if we vote for the right people they’ll create a fairer society by willpower alone. Nevertheless, I continue to believe I share core values with the institution that produces the newspaper – such as a belief in objectivity. This conviction is still being sorely tried over Northern Rock, although the newspaper’s triumphalism that accompanied the nationalisation of the bank – and the attempted expropriation of the assets of the shareholders – was mercifully short-lived. But it still seems that editorial policy is – in common with the other papers – to demonise Northern Rock.

I was very interested to read “The families who bear the brunt” on Saturday to get a feel as to where the credit crunch is leading. And it’s not pretty.

But it’s not purely NR’s fault. The article doesn’t say how typical the le Roux family are of NR borrowers, nor whether NR have a higher proportion of customers in difficulty than do other lenders. But let’s let this pass. This is a human-interest story in a newspaper, not a peer-reviewed academic paper in an economics journal.

I’ll also ignore the way Northern Rock is referred to ad nauseam throughout the piece, which could otherwise have been presented as an example of a problem no doubt affecting many borrowers with many different lenders. The paper needs a hook for the story. And it would attract fewer readers if the strapline was: “They are trapped in a Bath Building Society mortgage…”

But what I can’t ignore is the apparent spin put on the story itself. First, we are told that:

“The crux of the problem is that they [les Roux] owe nearly £170,000 to Northern Rock, but their home is only worth an estimated £152,000.”

But (OK, OK, I can see I’ve got “but”ter typing fingers today!) when we read the article carefully, we see that:

“They also have a £15,000 secured loan on the house from a company called Welcome Finance that is costing them a further £307 a month.” [My emphasis].

This, it seems to me, is the crux of their problem.

Without this loan they would just need to roll over a mortgage – £139,630 – secured on a house valued at £152,000. Lenders look at two things: the security on a loan and the customer’s ability to pay back the loan. Surely, in the case of the le Roux family, they’d have a sporting chance of remortgaging, were it not for the Welcome Finance loan. They need about 92%. Heck, if they had a car they could trade down they ought to be able to get it down to 90%. But who’s going to touch them with the extra 15 grand secured on the house? Lenders will be put off by the Welcome Finance loan secured on the property much more than they will be by the unsecured NR loan.

Then there’s the ability to pay. In addition to the mortgage, les Roux have not one but two chunky debts. And whilst a lot of borrowers will have the extra unsecured loan with NR or any of the lenders that have offered similar deals, it seems to me the killer is the Welcome Finance loan – an extra £307 a month they have to find. In comparison, the NR unsecured loan would cost les Roux £390 a month if they take their mortgage to another lender.

And the NR loan at least is not at a punitive rate. A box in the article is headed: “The cost of quitting? A massive 15.59%”. I hardly think 15.59% interest on an unsecured loan is excessive (try borrowing on a credit card). At random, there was an ad from Jessops, the camera chain, in the same edition of the Guardian. Jessops’ buy now, pay later deal charges a lot more than 15.59% for credit (though just a relatively small fee if you only need to borrow for less than 12 months). And is 15.59% really a lot more than les Roux are paying on their Welcome Finance loan? Their repayment to Welcome of £307 a month is £3684 a year. If £1500 of this is repayment of capital (i.e. we assume it’s a 5 year loan with constant payments and that the average balance outstanding is half the principal), this works out at a rate of approximately 14.4%.* But (oops, sorry) maybe it’s a 10 year loan (at about 19.5%) since, if we look at the Welcome Finance website, they’re currently offering secured loans from 22.1% or 19.9% for cars (of course, these rates could be a lot higher than those on offer last summer, because of the credit crunch). Welcome’s unsecured loans are a bargain at 64.1% (sic(k)).

So the interesting questions in the Guardian’s human interest story (perhaps we can have another exciting instalment next week) are around the Welcome Finance loan:

• how did les Roux come to have this additional debt?
• did it already exist when “[t]hey borrowed £169,630 from Northern Rock last summer“? [my emphasis – actually they changed the security on the debt by moving house]
• if so, did they tell NR about it?
• if not, how come they’ve gone further into debt? If I was lending money secured on a property I’d want to know about (and probably veto) any other debt to be secured on the property. Did NR know about the Welcome debt?
• was the Welcome Finance loan an attempt to keep paying the NR mortgage les Roux could never afford to pay in the first place?
• is the Welcome Finance loan anything to do with why NR “is not offering them anything else in terms of deals” and that “they would be better off taking their business elsewhere”? Would NR have offered to roll over their mortgage were it not for the Welcome debt?

There’s a lot about this story that is puzzling. But (doh!) my point is this: I get the distinct impression that the Guardian is still – consciously or unconsciously – trying to paint as bad a picture as possible of NR.

The psychologists will eventually have a field day with all this. This is the situation: we now all feel bad because we’ve all been borrowing too much and gloating over our rising house-prices. Now the chickens have come home to roost. So what we’re doing is bundling up all those bad feelings (the shrinks would say) and loading them onto the banks, and specifically the fattest scapegoat that makes the best sacrificial offering – aka Northern Rock. How do I know this? Amazing what you pick up in an MBA these days!

The point about scapegoating is that it does not necessarily – and usually doesn’t – address the root causes of a problem. I’m told that ancient South American civilisations would regularly sacrifice their priests when droughts came. Maybe there were a few fewer mouths to feed, but the value of this behaviour in preventing or even predicting the next drought was approximately nil. If only they’d known about the El Nino climate phenomenon! (Actually, there’s reasonable evidence that some farmers in the region are able to predict an impending El Nino by changes in cloud patterns. Maybe a few priests were on the verge of spotting this when they were slaughtered…).

For some reason I thought the Guardian would be immune from the scapegoating syndrome. I now ask myself why I thought this. How could I be so wrong? I guess it’s because I thought it was in the Guardian’s DNA to be against prejudice of any kind. They don’t even have “actresses” any more on Planet Guardian – we all have to work out some other way whether the “actors” we’re reading about are male or female. A small price worth paying for whatever it is we’re trying to achieve, of course. They have principles at the Guardian. Heck, they’re not even prejudiced against Old Etonians.

* Postscript: this method is highly dubious for the hypothetical 5 year loan – it’s too few years to make the simplifying assumption of even payment of principal. A spreadsheet suggests that paying £3684 a year for 5 years would in fact pay off £15,000 lent at about 7% which is unlikely. Over about 7 years would come in around 15% and 10 years around 20% as I suggest. Incidentally, the £390pcm doesn’t pay off the NR unsecured loan – at 15.59% this just covers the interest.