Turns out – would you believe – that the Newcastle-based lender, a pioneer of 125% mortgages and one of the most dominant lenders right at the peak of the market in early 2007, is getting clobbered by much higher-than-average default rates. Surprise, surprise!
Sarcasm aside, the Rock is just the tip of the iceberg, if you'll forgive the slightly mangled metaphor. The rest of the UK banking system, or certainly the bit that isn't effectively bust already, is getting set to slam down the loan window shutters as it runs shorter and shorter of money.
It all promises to be a very unhappy 2009 for borrowers…
Northern Rock is suffering much higher-than-average default rates
There've been probably more column inches within the last year devoted to the sorry Northern Rock nationalization saga than to any other company in the country, so I'm not going to add to them by talking about the right and wrongs of what the financial authorities did or didn't do.
We're stuck with it. But if anyone's looking for any further evidence that offering 125% mortgages is a completely brainless idea, particularly if the lenders responsible proceed to scatter their cash around like confetti, the latest news serves that up on a plate.
It turns out that from what The Telegraph calls "previously unseen documents" that Granite, the £40bn so-called 'off-balance sheet securitisation vehicle' which holds many of the mortgages issued by the Crock, is anything but rock-solid.
Payment arrears of 90 days or more on mortgages on Granite's books rocketed by two-thirds between this year's first and second quarters, according to the credit monitors at Standard & Poor's. That adds up to £508m-worth of dodgy home loans, even though rival banks saw relatively small increases in delinquencies. What's more, repossessions soared by 163% between the first and second quarters, again much worse than virtually every other lender.
The loan-to-value (LTV) ratio is another potential disaster. Average LTVs were 77% for Granite compared with 60% typically elsewhere, with almost 30% of Granite's loans at LTVs of 90%. That means a large chunk of borrowers will soon be dropping into negative equity territory as the housing market gets worse.
Today's Nationwide survey said that UK home values have already plunged 10.5% over the last year after a further 1.9% fall in August, while the Bank of England's governor Mervyn King this month forecast "a significant adjustment" downwards in house prices.
How much will this cost British taxpayers?
Here's the bad news for the public coffers: any financial pain of a major blowout in defaults would be shared between Granite bondholders and the Rock. Andrew South, S&P's senior structured finance director, tells The Times that "the deteriorating book increases the chances that taxpayers, ultimately, might have to shoulder some of the cost". And if that's not enough, you'll be less than glad to hear that on top of the £40bn Granite loan book, the Rock holds £37bn worth – on paper at least - of mortgages on its own balance sheet, which it says are of similar quality. Thanks, guys!
The cost to the taxpayer? "At the time of the nationalization, the Government was advised by Goldman Sachs that the loss could be between £450m and £1.28bn", says Patrick Hosking in The Times. And now? I dread to think. But I bet it'll be a long way north of even that higher figure, particularly as the economy gets worse. It doesn't take Einstein to work out why high-risk home loans have virtually disappeared off the radar screen. What's happening to over-indebted mortgage borrowers is, in a rather painful way, a microcosm of what's happening in the wider world.
Britain is heading for a major slump
The recent bank reporting season has already showed us that the balance sheets of UK lenders are looking fragile as both personal and corporate bad debts have started to stack up. In other words, demand for credit is dropping as bank customers' ability to make interest payments on their loans is getting worse by the day. And the other side of the coin is that the banks are toughening up their loan criteria.
"When lending standards go up, corporate defaults rise. And that's only just started", says James Fairweather, chief investment officer at fund manager Martin Currie. "This is the sharpest-ever rise in lending standards we have ever seen and it has continued to sky rocket."
But now, says Capital Economics, it's even looking unlikely that banks will be able to raise all the capital they need to keep expanding their balance sheets as fast as they have been. So they'll have to ration the supply of credit even more.
Lending growth won't just slow, it could actually fall outright: "if banks fail to raise any more capital than the £20bn raised so far, lending could contract by 7% - and reducing lending to UK households and firms could have dire implications".
It's all pretty desperate news for the UK economy, which "may already be in recession and is now expected to contract in 2009 as a whole", says Capital Economic's Vicki Redwood. She concludes: "A full-blown slump is a growing possibility".
There's not a lot more to add to that.
UK shares closed strongly, with the FTSE 100 index advancing 57 points, 1.16%, to 5,528, though the FTSE 250 was flat. Housebuilder Taylor Wimpey reversed much of the previous day's gain, shedding 7% after reporting a £1.54bn loss. Other stocks in the sector also suffered, with Persimmon and Barratt Developments both 2% down and Bovis losing 3%. In contrast, miners generally did well, with Antofagasta and Vedanta both up 4% and Kazakhyms adding 2%. BSkyB rose 1% on a bullish Goldman Sachs note but Johnston Press slid 7% after announcing an 18% pre-tax profit drop and a scrapped interim dividend.
Shares in Europe were mixed yesterday, with the German Xetra Dax easing 0.3% to 6,321 but the French CAC 40 nudging up 0.1% to 4,373.
US stocks were firmer, with the Dow Jones Industrial Average adding 90 points, or 0.8%, to end at 11,503 and the wider S&P 500 gaining a similar percentage to 1,282. The tech-heavy Nasdaq Composite added 0.9% to 2,382.
Overnight the Japanese market was again almost flat, adding 15 points, 0.1%, to 12,768, though in Hong Kong the Hang Seng slid 551 points, 2.6% to 20,914.
This morning Brent spot was trading at $115, spot gold was at $834, silver at $13.74 and platinum at $1,443.
In the forex markets this morning, sterling was again weak, trading against the dollar at 1.8370 and against the euro at 1.2447. The dollar was trading at 0.6776 against the euro and 109.03 against the Japanese yen.
And in London, French bank Credit Agricole reported that second quarter profit had slid by 94% to €76m, after writedowns related to troubled US bond insurers. However, its Tier 1 capital ratio remained steady, reports Bloomberg. 
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