U.S. private-equity investors Wilbur Ross and J. Christopher Flowers, who've made billions of dollars turning around industries from steel mills to Japanese banks, are lining up to finance British homebuyers as the country's biggest banks pull back.

Five years after mortgage lender Northern Rock Plc collapsed, loan approvals are about half what they were in the boom decade that ended in 2007 and the government is pressing for more competition. Even Tesco Plc, the nation's biggest retailer, is stepping in to help fill a funding gap spawned by the global credit crisis and reduced bank lending as the housing market shows signs of improvement after nine months of declines, according to Hometrack Ltd. data this week.

"They're betting the market has bottomed out and there will be a recovery," said Ray Boulger, senior technical manager at mortgage broker John Charcol Ltd. in London.

Flowers's buyout firm, JC Flowers & Co., set up a lender offering private-equity-style terms, allowing homeowners to forgo monthly payments in exchange for sharing the profits when their home is sold. Ross, who built his fortune buying bankrupt steel, coal and textile companies, invested 350 million pounds ($526 million) for a 45 percent stake in Richard Branson's Virgin Money Ltd.

Both investors' firms are among bidders for 316 branches that Royal Bank of Scotland Group Plc is selling as a result of its government rescue. Bank of England Governor Mervyn King this week urged the government to split RBS into a so-called good bank and a bad bank — the same strategy used with Northern Rock — to speed the return of Britain's biggest publicly owned lender to private hands after it was bailed out five years ago.

The new competitors are breaking into a mortgage market that's been dominated for decades by RBS, Lloyds Banking Group Plc, Barclays Plc, HSBC Holdings Plc and Santander U.K. Plc, which was Abbey National Plc until Spain's Banco Santander SA purchased it in 2004. The five banks controlled about 62 percent of the country's mortgage market in 2011, down from 73 percent in 2010, according to the latest figures from industry group the Council of Mortgage Lenders.

"It's not an easy market to enter, especially if you're trying to build big from scratch," said Stephen Noakes, commercial director at Lloyds, the country's biggest mortgage lender.

Ross, 75, said by e-mail that "in one recent month Virgin made more than one-third of all the single-family mortgage loans in the entire U.K. market."

U.S. buyout firms are playing an increasingly larger role in the U.K. housing market. Oaktree Capital Group LLC, the Los Angeles-based investor led by Howard Marks, last month bought homebuilder Countryside Properties Plc. It already has a stake in Countrywide Plc, the U.K.'s largest real estate broker, along with Leon Black's Apollo Global Management LLC and Alchemy Partners LLP. Countrywide is currently seeking to raise 200 million pounds in an initial public offering.

Flowers, Ross and others such as Vernon Hill, another American who three years ago co-founded Metro Bank, the U.K.'s first new consumer bank in more than a century, see an opening in the scandals and bad debts that have sullied the reputations and balance sheets of Britain's biggest banks.

With the country at risk of slipping into its first triple- dip recession, the government is encouraging new competition as it tries to help homebuyers by making mortgage money available.

Chancellor of the Exchequer George Osborne, for instance, said last month that bank-payment systems will be regulated to safeguard the interests of new entrants. And the Financial Services Authority will allow startup banks to open with core capital equal to 4.5 percent of their assets, about half the level for bigger banks, FSA Chairman Adair Turner told the Banking Standards Commission on Feb. 27. Smaller banks had been required to reserve more capital than larger rivals.

"The government certainly wants more competition," Boulger said.

The Treasury also worked with the BOE to start an 80 billion-pound lending program that allows banks to borrow at cheaper rates for as long as four years.

"Research shows that almost 40 percent of customers would consider switching to a new entrant," Virgin Money Chief Executive Officer Jayne-Anne Gadhia, 51, said by e-mail. "While some lenders have been shrinking their mortgage books, Virgin Money has supported the market by growing lending."

Flowers, 55, who moved to London from the U.S. last year to help oversee the firm's European assets, invested 65 million pounds in Castle Trust, which opened in October. It's providing customers' financing for home deposits and hedging its bets by selling bonds linked to a home-price index to retail investors.

Castle Trust lends buyers a portion of their down payment and helps arrange a mortgage from a traditional lender, such as Kent Reliance Building Society, in which Flowers bought a stake. With a Castle Trust shared-equity loan, customers don't have to repay until the debt matures or the property is sold; then Castle Trust takes as much as 40 percent of any profit or shares 20 percent of any loss.

"We're providing people with a safer way to buy their home because we're allowing them to issue equity," Castle Trust CEO Sean Oldfield said in an interview. "We share in the profit and loss."

The private-equity firm's U.K. business is led by former FSA Chairman Callum McCarthy, who headed the regulator when Northern Rock was nationalized and during the build-up to the bailouts of RBS and Lloyds. Near the end of his term in 2008, a parliamentary committee criticized the agency for failures in supervising Northern Rock, the first U.K. lender to suffer a run on deposits in more than 140 years.

Virgin Money's Gadhia said last year that she saw an opportunity in Northern Rock. Buying the failed bank would instantly give Virgin the footprint and product range to vie with Britain's biggest retail banks.

Advised by investment bank Greenhill & Co., she put together a group to bid for the stricken bank. Among those Greenhill approached was Ross. His private-equity firm, WL Ross & Co., invested about 350 million pounds to take over Newcastle-based Northern Rock's retail operations in a deal that was completed in January last year.

Gadhia said last month that since Virgin Money and Northern Rock combined at the start of 2012, new and existing customers had opened more than 1.2 million new accounts with the bank, which currently has 75 branches.

Other companies are getting into mortgage lending. Tesco, the U.K.'s largest grocer, began offering mortgages to customers with a minimum 20 percent deposit in August. Rival retailer Marks & Spencer Group Plc in June announced a plan to open 50 bank branches in its stores within two years. M&S Money, a joint venture with HSBC, opened its first bank branch in central London in July.

Metro Bank, whose co-founder Hill built Commerce Bancorp Inc. into the largest bank in New Jersey, said in June it had raised 126 million pounds to expand to 200 branches in greater London by 2020 from 15 now. New York-based hedge fund Moore Capital Management LLC purchased a stake in the London-based bank last year, Sky News reported.

"If you look at the U.K. relative to some other jurisdictions, it looks more profitable" for mortgage lending, Lloyds's Noakes said. That's because lenders have the ability to "re-price the back book of customers," he said, meaning banks can change rates after a few years depending on loan terms and market conditions.

Seeking to expand their presence, Flowers and Virgin are among bidders competing for the RBS branches that the Edinburgh- based lender is selling in connection with its government rescue, two people with knowledge of the process said in November. Apollo and JC Flowers are forming a joint venture to bid for the branches, Sky News reported in December.

Private-equity firm AnaCap Financial Partners LLP, which started Aldermore Bank in 2009, is also bidding for the RBS sites. The London-based buyout firm last year formed a joint venture with Blackstone Group LP, the world's biggest private- equity firm, to seek investments in banking and insurance.

Housing is recovering faster in the U.S. than in the U.K. With mortgage rates near historic lows, 4.66 million previously owned houses sold last year in the U.S., the most since 2007, the National Association of Realtors said last month. Prices gained 12 percent in January from a year earlier, the biggest 12-month increase since 2005.

Both Hometrack and Halifax, a unit of Lloyds, said this week that U.K. house prices rose in February, a sign that the government's credit-boosting measures are helping. The average cost of a home increased 0.2 percent from January to 162,638 pounds, the Nationwide Building Society said this month. House- price growth accelerated to 0.6 percent in the three months through February from 0.4 percent in the previous three months.

Still, the number of loans for home purchase fell 3 percent in January from a year earlier, the Council of Mortgage Lenders said in a Feb. 20 statement. Home mortgages totaled about 540,000 last year compared with 1.01 million in 2007, according to the CML.

"There's clearly plenty of scope to increase mortgage lending," Boulger of John Charcol said. "There are plenty of signs we've come through the worst of it. It's just a question of how long it takes to see the recovery."

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