Revealed: massive hole in Northern Rock's assets

Revealed: massive hole in Northern Rock's assets

Fresh doubts emerged last night about Northern Rock's ability to repay the £23bn of taxpayers' money it has been loaned by the Bank of England.

A Guardian examination of Northern Rock's books has found that £53bn of mortgages - over 70% of its mortgage portfolio - is not owned by the beleaguered bank, but by a separate offshore company.

The same investigation reveals just how vulnerable the bank is to a cooling property market and demonstrates the scale of Northern Rock's exposure to mortgages where customers have borrowed heavily against their homes.

The mortgages are now owned by a Jersey-based trust company and have been used to underpin a series of bond issues to raise cash for Northern Rock. It means the pool of assets available to provide collateral for Northern Rock's creditors, including the Bank of England, is dramatically reduced, calling into question government claims that taxpayers' money is safe.

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This week the chancellor, Alistair Darling, told parliament taxpayers' money was safeguarded. "Bank of England lending is secured against assets held by Northern Rock. These assets include high quality mortgages with a significant protection margin built in and high quality securities with the highest quality of credit rating," he said.

The first tranche of the Bank's emergency lending to Northern Rock in September has been secured against specific assets. But the second tranche is secured only by a more general floating charge, which would mean the Bank would be vying with other creditors for repayment if Northern Rock failed. It is not clear how much money was loaned in each tranche, but the emergency loans are thought to have been for about £11bn each.

A number of bidders have expressed an interest in buying Northern Rock but the offers have been below the stock market price of the shares suggesting there are concerns about the bank's underlying value. The Guardian's analysis of £58bn or 75% of Northern Rock's residential mortgage portfolio reveals the extent of exposure and suggests the company is suffering from rising arrears and repossessions.

Among the findings are:

· Mortgage loans of over 90% of the purchase price of a house have soared to £16bn, from £2.7bn, in the space of three years.

· Loans have exceeded the value of the property on nearly 2,500 mortgages, with a value of £263m. Three years ago, the figure was just £13m on 158 properties.

· 10,000 Northern Rock customers are a month or more in arrears on their mortgages, on loans worth nearly £1.2bn. At the end of 2003, there were only 2,500 in the same difficulties, with mortgages worth £168.8m.

· In 2003 Northern Rock repossessed 80 properties. Last year more than 1,000 properties were repossessed. By the end of September this year 912 properties had already been repossessed.

A rising loan to value ratio leaves Northern Rock exposed to any slump in house prices. Any property market crash would also have an impact on the company's arrears position.

The Guardian analysis has also discovered that Northern Rock has admitted being in breach of the conditions of the securities it has sold through its Jersey-based Granite Master Issuer, the company which packages and sells mortgage backed securities, but it has decided to ignore the breach. The breach occurred in September when Fitch, one of the main ratings agencies, downgraded Northern Rock's long-term credit ratings.

Richard Murphy, a forensic accountant and director of Tax Research, who has followed the Northern Rock affair and scrutinised its relationship with Granite, is concerned that the division between Northern Rock and Granite has been blurred, creating uncertainty over its mortgage portfolio.

"This should be a concern for the Bank and the Treasury particularly if the emergency loans have actually been used to finance the activities of Granite rather than Northern Rock. It would be harder for the government to secure preferential treatment over other creditors if it is shown that the money was actually for Granite's benefit," he said.

Guardian Unlimited © Guardian Newspapers Limited 2007