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Northern Rock Said to Consider Sale of Mortgage Securities

March 11 (Bloomberg) -- Northern Rock Plc may sell retail mortgage-backed securities for the first time since its rescue in 2007, according to a person with knowledge of the situation.

The Newcastle, England-based bank is considering offering the securities in the first half of the year, though it would continue to be funded mainly by retail deposits, said the person, who declined to be identified because the plans are private. A final decision hasn’t been made, the person said.

The funding plan would potentially enable the bank to expand its balance sheet by increasing lending. It could also use excess liquidity to purchase mortgage assets from other banks, the person said. These could include mortgages held by government-owned Northern Rock (Asset Management) Plc, which split from the rest of the bank last year.

Northern Rock “will look at ways to diversify funding going forward,” spokesman Brian Giles said, without elaborating.

Northern Rock was bailed out by the Bank of England in 2007 when money markets froze, leaving the bank unable to gain funding by securitizing its mortgages. Retail deposits account for 99 percent of the bank’s funding and the bank lends less than it takes in from customer deposits. Chairman Ron Sandler said this week the bank plans to increase new lending and seek new ways to use its excess liquidity.

Banks create mortgage-backed securities by packaging property loans into notes of varying risk and returns. Northern Rock this week disclosed customer mortgage arrears of 0.17 percent, compared with an industry average of 2.11 percent.

Prices Rise

Northern Rock is considering returning to the U.K. securitization market as its existing mortgage bonds are trading at the highest level since Lehman Brothers Holdings Inc. filed for bankruptcy protection. Senior bonds issued through Granite Master Issuer Plc are trading at 95 percent of face value, the highest since September 2008, according to JPMorgan Chase & Co. data. The notes dropped as low as 67 percent of face value in January 2009.

The U.K. lender issued and kept 2.2 billion pounds ($3.5 billion) of mortgage-backed securities in January 2010 through Gosforth Funding Plc, a company set up to create the notes. Banks in Europe can use senior portions of securitizations as collateral to raise liquidity from central banks.

Northern Rock this week posted a 232.4 million-pound loss for 2010, partly because of costs related to restructuring.

To contact the reporters on this story: Jon Menon in London at jmenon1@bloomberg.net; Esteban Duarte in Madrid at eduarterubia@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net;

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