New fears over Northern Rock debts

There were renewed fears over lender Northern Rock’s ability to repay its £24bn (€33.4bn) taxpayer debts today after a newspaper raised doubts about its mortgage assets.

More than 70% – or £53bn (€74bn) – of the beleaguered firm’s mortgages are owned by a Jersey-based offshore company, The Guardian said.

The Newcastle-based lender uses a web of offshore companies under the Granite name for fundraising based on its mortgages, with the Bank of England’s emergency lending also secured against its home loans.

But the complexity of the system means it is unclear how much of the assets the Bank would have a claim to if Northern Rock was wound up.

Investors in the bank’s mortgage-backed fundraising – known as securitisation - could also have a claim on the mortgages, the newspaper adds.

Northern Rock, which was not immediately available for comment, has also seen a sharp rise in mortgage arrears over the past five years as it aggressively expands its mortgage business.

Around 10,000 customers with mortgages worth a combined £1.2bn (€1.7bn) are now in arrears, compared to 2,500 with mortgages of £168.8m (€235m) at the end of 2003, the report says.

The lender – at the centre of the UK’s first bank run for nearly 150 years in September after it was forced to seek emergency funding – has also become more exposed to a fall in property prices.

The value of Northern Rock’s mortgages where its loans account for more than 90% of the property has spiralled from £2.7bn (€3.8bn) three years ago to £16bn (€22.2bn) by September this year.

Nearly 2,500 mortgages worth £263m (€365.5m) were in excess of the value of the property.

The uncertainties around the quality of Northern Rock’s assets has put doubts in the mind of some potential rescuers, the Guardian claims.

This week, Northern Rock warned it had received approaches which were “materially below” the value of the business.

The group, which employs around 6,000 staff, is in talks with “a number” of potential parties which included a Virgin-led consortium, private equity firm JC Flowers, investment group Olivant and Cerberus, another private equity firm.

Chancellor Alistair Darling, who was forced to step in to guarantee savers’ deposits to end the bank run, will have the final say over any rescue plans for the group.

The lender’s problems began in the summer’s credit crisis, which seized up the money markets where the bank borrows most of its cash for mortgage lending.

Banks fearful of exposure to losses on investments based on high-risk US mortgage debt became much more cautious over lending, triggering the crisis at the lender.