Yesterday, Northern Rock announced that it will offer up to £14 billion of new mortgage lending over the next two years. The U.K. Treasury confirmed the new plan and that it would “no longer actively pursue a policy of rapidly reducing [Northern Rock’s] mortgage book.” Northern Rock was nationalized last year and the U.K. government has been working towards eventual privatization. The details of the new mortgage lending plan, which will require a restructuring of the bank and state aid approval, are still being finalized with the government, but will include the following key elements:

  • Northern Rock will offer up to £14 billion of new mortgage lending over the next two years
  • A range of mortgage products covering home purchase, including first-time buyers, and remortgaging
  • Responsible new mortgage lending that will be competitively priced to deliver a commercial return
  • The bank’s capital base will be strengthened by up to £3 billion
  • Additional funding to support new lending will be partly provided by an increase in the Government loan to Northern Rock, with an extended repayment schedule  

Commenting on the new plan CEO Gary Hoffman said, “I am delighted that we can now return to the mortgage market in a more meaningful way, on a commercial basis. It represents another important step in the ongoing rehabilitation of the Company, returning to financial viability and ultimately returning to the private sector.”

Similar to other financial institutions, Northern Rock has suspended bonuses and pay increases for senior management for 2008 and 2009.

Separately, it has been reported that the U.K. government is in discussions with Lloyds Banking Group about potentially waiving dividends on its preferred investment in Lloyds in exchange for enhanced mortgage lending commitments, although it is not clear whether that would be accomplished by converting preference shares to ordinary shares, as was done with RBS.

In the U.S., Treasury is aggressively using Fannie Mae and Freddie Mac, which are operating in conservatorship, as vehicles to promote recovery in the home loan markets.