The Treasury allowed Northern Rock to continue approving 125 per cent mortgages for six months after the bank received cash injections from the Government, it has emerged.
According to a report on Northern Rock by the National Audit Office (NAO), the struggling bank lent £1.8billion in risky 125 per cent mortgages
during the six months after it accepted emergency support from the Bank of England in September 2007 until the brink of its nationalisation in February 2008.
Northern Rock's Together Mortgage – which allowed homeowners to borrow up to 125 per cent of the value of their home – enabled many first time buyers to get on the property ladder who would otherwise have struggled, but became increasingly controversial when house prices started plummeting, plunging many homeowners into negative equity.
The National Audit Office's report found that the Treasury was aware of its "potential shortcomings" in dealing with banks that were in difficulty, but ultimately it concluded that the Treasury acted in the best interests of the taxpayer by nationalising Northern Rock.
While the Treasury could have conducted a "more systematic assessment" of the problems facing Northern Rock and the risks it was undertaking, said Tim Burr, head of the NAO, it "successfully met its objective to protect Northern Rock's depositors and stopped the run on the bank."
Edward Leigh MP, Conservative chairman of the public accounts committee, which oversees the NAO, said: "While depositors were queuing up outside branches to withdraw their money and the Treasury was pouring public money in to stabilise the Rock, the bank was still ploughing on with awarding mortgages of up to 125% of a property's value.
"Why didn't the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place?"
Business Secretary Lord Mandelson told the BBC that the Government knowingly made decisions at the time to allow Northern Rock to keep operating and maintain mortgage lending, because the alternative was to out it into receivership. "You did not want to do that, you wanted to tide Northern Rock over," he said.
In its report, the NAO criticises the Treasury for not carrying out a more thorough evaluation of the bank's finances before it decided to nationalise it, and accuses it of failing to notice to quality of its loan book. Greater scrutiny would have revealed far worse levels of mortgage arrears – largely as a result of the 125 per cent mortgages than the bank had admitted. The Together mortgages accounted for 30 per cent of Northern Rock mortgage
lending during the period in question.
Primarily as a consequence of making these huge loans, which have resulted in high levels of arrears and repossessions, Northern Rock has announced losses of £1.4billion for 2008.
Robert Peston, business editor at the BBC, said that the NAO
report adds to the increasing "mountain of evidence" that the Government, the Bank of England, and the Financial Services Authority, did not appreciate that "they were steering the Titanic into the mother-of-all economic icebergs."
"Their misjudgements in the Northern Rock debacle were symptomatic of a much more serious economic myopia: they didn't see that the architecture of the financial system was fatally unstable and that the foundations of our economy were being undermined by the burden of excessive borrowing."
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