UK's Northern Rock Made Risky Loans After Rescue

British mortgage lender Northern Rock continued to write high-risk loans for months after authorities stepped in to give the bank emergency support, a public spending watchdog said on Friday.

Northern Rock became the first British bank to fall victim to the financial crisis in September 2007 when the Bank of England gave it an emergency loan after it had problems raising finance in short-term wholesale debt markets.

The news sparked a run on the bank, with many investors queuing to withdraw savings from Northern Rock branches.

The government calmed the panic by guaranteeing deposits and in February 2008 was forced to nationalize Northern Rock, which had grown rapidly by lending aggressively to home buyers.

A report by the National Audit Office (NAO), Britain's public spending watchdog, said Northern Rock had continued to write controversial loans for up to 125 percent of a property's value for months after seeking help from the Bank of England.

Such high loans, now unobtainable, are widely seen as symptomatic of a housing market bubble before the credit crunch.

Northern Rock's "Together" mortgage included a secured loan of 95 percent of the value of a property together with an unsecured loan, which could be used for any purpose, of up to 30 percent of the property's value.

Between September 2007 and February 2008, when Northern Rock was nationalized, more than 1.8 billion pounds ($2.56 billion) of "Together" loans were written, the NAO said.

"At 31 December 2008, Together mortgages represented around 30 percent of the mortgage book but about 50 percent of overall arrears and 75 percent of (home) repossessions," it said.

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Although the initial Treasury guarantee prevented wider financial instability, it did not completely stem the outflow of funds from Northern Rock, requiring further borrowing from the Bank of England and more government guarantees, it said.

The NAO concluded that the Treasury analysis that led to the nationalization of Northern Rock was "sufficiently robust."

But it said that, before Northern Rock was nationalized, the Treasury did not commission its own due diligence on the company's operations or on the quality of its loan book. It said the Treasury did not challenge strongly enough Northern Rock's forecasts of future trading conditions before approving its initial business plan under public ownership.

The plan assumed a 5 percent fall in British house prices between 2008 and 2011. In fact, house prices have already fallen by around 20 percent from their peak.

Among its recommendations, the NAO said the Treasury should systematically address the risks to the taxpayer when it decides to help a company in difficulty and should vigorously challenge the assumptions underlying any future business plans presented by Northern Rock.

"We note that overall the report finds the Treasury was right to take the decisions it did to protect the interests of taxpayers and to promote stability in the financial system," a Treasury spokesman said.

The crisis has also forced Britain to nationalize the mortgage book of Bradford & Bingley bank and to take large stakes in two other banks, Royal Bank of Scotland and Lloyds Banking Group. Britain is moving to tighten regulation in the wake of the crisis.

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