If you did not have a savings account at Northern Rock, you probably think you have escaped any damage from the credit crunch. Think again: the fall-out from the crisis has only just started.
By the time it's finished, if the gloomiest predictions prove accurate, house prices could be sharply lower, repossessions much higher, borrowing more expensive and harder to get - and a number of our leading banks could have slashed their dividends and tapped their investors for extra capital.
Evidence of the pain being caused by the turmoil in the financial markets is mounting daily. Paragon, one of the biggest buy-to-let lenders, was last week forced to arrange a £280m rights issue to fund its day-to-day operations. It said it will call on that money by February unless the wholesale financial markets, where it has traditionally raised cash for its mortgage business, start to recover from the current paralysis. It also said it had halved the amount of new lending it is doing because it was impossible to borrow at realistic rates.
Two days later, Kensington - one of the pioneers of 'sub-prime' lending to borrowers with low credit ratings - said it was withdrawing its Adverse range of sub-prime mortgages and changing the terms of its buy-to-let lending, blaming a lack of interest from investors for financing such business.
Even lenders that do not rely exclusively on the wholesale markets for their funding are finding life much tougher: Bradford & Bingley, which raises around half of its funds through its army of savers, last week sold £4.4bn of its portfolio of loans at below face value. While a bank spokeswoman said the sale had been under consideration for months, spurred by new European regulations on banking capital, City analysts point out that it also helped to ensure B&B had enough capital to keep its business going. One analyst estimates that £5.7bn of B&B's wholesale funding matures within the next three months, so the sale would not wholly cover that.
The same analyst believes that Alliance & Leicester is even more exposed, with an estimated £10bn of funding arrangements expiring within three months. While it can follow B&B's example by selling assets, it does not have such a high-quality commercial portfolio, so would have to accept a much larger discount to face value.
Even Nationwide, which raises more than 70 per cent of the funds for its lending from its own branches, admits that raising the wholesale money it needs has been tough. Finance director Mark Rennison says markets have been 'very difficult' - and on some days they have been so 'dysfunctional' they were 'unable to offer anything at all'.
One result has been a sharp decline in the amount of mortgage money available for borrowers, particularly at the higher-risk end, and an increase in costs. On the day Northern Rock called on the Bank of England for help, Abbey National and Halifax both increased their mortgage rates by 0.2 per cent, despite the fact that Bank base rates had not changed, and brokers say it is much harder now to get the more aggressively structured loans.
Saurabh Mukherjea, banking analyst at Clear Capital, points out that, in 2006, £90bn of the £110bn mortgage lending in the UK was financed by 'mortgage-backed securities', as lenders' securitised offerings on the wholesale financial market are called. This year, he says, that could fall as low as £50bn and next year could be lower still. While some lenders, such as Halifax parent HBOS and Bradford & Bingley, have replaced some of that funding with bonds, these markets are now closing off as investors become sated with mortgage debt.
'The crunch is hitting the real economy now. We are entering a phase when the man in the street will see constrained lending,' says Mukherjea.
Fewer mortgages means fewer housing transactions and that, in turn, is likely to mean lower house prices. The real pessimists, such as Numis banking analyst James Hamilton, think we will see a new wave of personal insolvencies, bankruptcies and house repossessions. 'The market is more overvalued than at any time. If prices halved, they would still have averaged an annual rise of 4 per cent a year over the past 12 years, or 63 per cent compound,' he says.
Even the more optimistic, such as Nationwide, are predicting no price rises next year, while Capital Economics expects 3 per cent declines in 2008 and 2009 - a severe slowdown from the time, only months ago, when they were rising by that much every month.
However, there are some beneficiaries from the crunch - as Nationwide's interim results, issued last week, underlined. Its retail deposits doubled in the six months to September and it says that October was also a good month because it benefited from savers' exodus from Northern Rock and a general flight to quality. Deposits are expected to remain healthy as turbulent markets discourage investment in shares.
That means those lenders with strong balance sheets and a good base of retail savers - such as Nationwide and HBOS - will be able to gain market share. Ray Boulger at mortgage broker John Charcol says Halifax is offering good deals again, having stepped back from the market during October, and he believes that the lack of competition in the market means well-funded banks like these could start to make much higher margins than in recent years.
'Vulture funds', which specialise in buying distressed shares and are already circling Northern Rock, could also be able to snap up some other bargains. Paragon's shares had already dropped from more than 650p in January to little over 200p by the time of Tuesday's warning of financing difficulties, an announcement that wiped a further 40 per cent off their value.
Mukherjea points out that, at around £100m, Paragon's market value is less than a third of the value of its mortgage assets. These remain of good quality - Paragon says its bad debts are less than a third of the market average, at under 0.5 per cent of its loan book - so a buyer such as Cerberus, which is eyeing Northern Rock, or Lone Star, is likely to be looking at it closely.
The next few weeks should give a better picture of the state of the market as a series of banks issue trading updates, starting with Barclays and B&B next week. These will now not just be commentaries: big banks such as Barclays and Royal Bank of Scotland - with substantial income from securitising US sub-prime mortgages and other loans, and large holdings of these assets on their balance sheets - will also be updating the market. BarCap, Barclays' investment arm, has already announced its £1.3bn write-down provisions, but Derek Chambers of Standard & Poor's says there could be more to come. He points out that the index of the highest rated sub-prime securitisations fell from 95 to 80 during October, the end date used by most of the banks to have announced sub-prime write-offs. In the past 10 days, however, it has dropped to 66. If that level is sustained, or the index falls further, provisions may have to be far higher than expected.
That could undermine the capital base of even the largest banks. Paragon, unsurprisingly, decided last week not to pay its dividend; it could be the first of many to do so. RBS, having just acquired part of ABN Amro, is particularly stretched, but Barclays' capital could also be eroded by further write-offs at BarCap.
'The second wave of the credit crunch is going to be much more painful than the first,' warns Numis's Hamilton.
Northern Rock in numbers
£350m
Market value, down more than 40 per cent in the past two weeks
£113bn
Assets as at 30 June
£96bn
Mortgage book at 30 June
£24bn
Retail deposits at 30 June
£80bn
Securitisations, covered bonds and other wholesale funding at 30 June
£23.5bn
Estimated Bank of England support
£12.5bn-£15bn
Estimate of deposits lost since September
19 per cent
Mortgage market share, first half of 2007
4 per cent
Estimated mortgage market share now