What on earth is happening to our mutuals? Hardly a month passes without a building society having to be saved by a larger society, reducing the once proud building society movement to a mere 50-odd societies.

Then came yesterday Moody’s downgrading nine of them amid concerns about their exposure to falling house prices and specialist mortgage lending.

Time was when building societies were considered literally as ‘safe as houses’ but now they seem to be suffering a similar hangover to the banks, having strayed from doing what they do best, to dabbling in more risky commercial mortgages.

The latter were part of the reason for the difficulties at the Dunfermline Building Society which had to be rescued by Nationwide, with the latter rapidly becoming the saviour of its weaker brethren – a role it is keen to shed and one which is putting its own resources under pressure.

It appears that Nationwide may have been leant on by the Treasury to rescue the Dunfermline.
A Nationwide insider told me only a month before news of the Dunfermline’s troubles broke, that Nationwide did not plan or wish to acquire any more mutuals for the foreseeable future.

“We have enough on our plate integrating the Cheshire and Derbyshire building societies” he said. (Both of these societies had to be acquired in September 2008 due to bad loans). But now it has Scotland’s largest mutual, with £3,303 million of assets and 300,000 members to integrate.

Other building societies have exposure to subprime loans and there has been a rash of takeovers in recent years, with Skipton acquiring the Scarborough, Yorkshire taking on the Barnsley and Chelsea integrating the Catholic Building Society in the last year alone.

So are our building societies doomed to a slow, but inevitable, reduction in numbers to a handful of large players, or even extinction?

Yes, if you believe Moody’s gloomy assessment of their creditworthiness. The ratings agency yesterday downgraded nine societies, including the Nationwide, Chelsea, West Bromwich, Principality Newcastle and Norwich & Peterborough, after stress testing how they would perform in the event of a 40 per cent or 60 per cent fall in house prices from their peak in 2007.

The other societies which were downgraded, but less severely, were the Coventry, Skipton, Yorkshire.

Such downgrading will make it harder for these societies to raise capital in the wholesale markets, but this is hardly devastating given that building societies rely on customers’ deposits for the bulk of their lending.

Building Societies Association director general, Adrian Coles, hit back saying that Nationwide’s house price index has registered only an 18.9 per cent fall in prices from October 2007 until now and that societies have been deemed sufficiently strong to use the government’s credit guarantee scheme, which enables mutuals to issue government-backed debt.

The ratings agencies did not exactly cover themselves in glory in the run up to the credit crunch, when they failed to spot the massive risks and over leveraging building up in banks and companies. To suddenly subject the UK building societies’ mortgage books to extreme stress testing smacks of over reaction.

This article was written by PAMELA ATHERTON. Michael Baxter is on holiday.