Northern Rock has announced losses of £1.4billion for 2008, as liquidity in the mortgage market has remained dry and lending conditions tight.
Northern Rock has been hit by conditions in the "external economic environment" which have "deteriorated markedly" since the bank's business plan was formulated upon its nationalisation more than a year ago, said the bank's chairman Ron Sandler in a statement.
The impact of this on the wider economy has led to further contraction of liquidity and even tighter lending conditions, conspiring to cause the housing market to decline more rapidly than expected.
Despite the "challenging economic backdrop", however, "Northern Rock made solid progress" against its main objectives, Mr Sandler said, which includes repaying its £27billion loan from the Government, of which it repaid £18billion last year – well ahead of schedule.
It managed to do this largely through its mortgage
redemption scheme, which saw it turn customers away and encourage existing borrowers to go elsewhere when their mortgage deals came to an end, reducing its mortgage balance sheet by 27 per cent.
But it still suffered a marked increase in the level of mortgage arrears, along with the wider market, and this had a negative effect on the quality of its balance sheet, and a 63 per cent increase in repossessions has contributed to the bank's losses.
Due to the continuing difficult conditions in the economy, Northern Rock has negotiated a new plan, in line with the Government's drive to encourage mortgage lenders
to increase the amount they lend.
In a u-turn on its previous policy, it has agreed to slow down its redemption policy and boost its mortgage lending by £14billion over the next two years, in return for more cash from the taxpayer.
"The Company is now in a much stronger state and is beginning its journey back to private ownership." said Mr Sandler.
Chief executive Gary Hoffman, added: "2008 has been a challenging year for Northern Rock but I am pleased to report that the Company has made good progress against its business objectives."
"Northern Rock has achieved a great deal over the last year, in very difficult circumstances. I believe we have now put the foundations in place to allow the business to look forward to the next phase of its development."
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