Secret societies?

Two years ago, while the international banking community witnessed a complete shutdown in the mortgage backed securities market, a number of mutual organisations thought they had spotted an opportunity.

The freeze in global liquidity meant that some of the biggest UK non-mutual lenders were going to have to withdraw from their respective markets, leaving huge swathes of customers without financing options for residential, commercial and second charge mortgages.

More adventurous bosses at building societies pushed ahead developing specialist lending propositions. After all, the Building Societies Association (BSA) had been lobbying the UK government to allow mutuals greater access to the wholesale money markets. At the time, the BSA wanted to increase the maximum funding limit from the international money markets from 50% to 75%.

The Butterfill Bill allows mutuals to do just this, but it also allows building societies to merger with other mutual organisations. This has been the case with Britannia and the Co-operative Bank. The bill has made its way through the various stages of parliament and the Britannia now looks set to morph into a ‘super mutual’.

The Nationwide has also grown considerably, albeit through a flurry of mergers and acquisitions, in the past 18 months but not all societies, however, have escaped the economic downturn without difficulty.

West Bromwich Building Society, for example, retreated from most of its specialist lending areas, including heavy commercial finance activity and the launch of a residential second charge lender, White Label Loans. This was one of a handful of lenders to witness greater scrutiny from analysts and, more recently, a downgrade on its financial strength rating.

Principality Building Society has also been the subject of much speculation. It amassed an additional £134m in commercial and alternative lending assets between 2007 and 2009 according to the figures supplied for this survey. Even to this day, the mutual still offers commercial and residential second charge loans though, through its Nemo Personal Finance subsidiary, although lending criteria are now considerably tighter than during the years of the lending boom.

At the time of going to press, these two lenders were still fully operational. However, notes from rating agency analysts suggest that further impairments may soon come to light. Chelsea, Coventry and Newcastle building societies have also been subject to rating downgrades, meaning that concerns have been raised about either their short or longer term financial strength.

A number of mutuals hit the headlines as the credit crunch began to bite and were forced to merge with rivals. Industry experts say that the Financial Services Authority (FSA) considered the financial strength of many societies insufficient to continue trading in their current forms.