Rock made risky loans after bail out

Stricken bank Northern Rock lent £1.8bn in mortgages of more than 100 per cent, the kind of toxic loans that caused its downfall, even after it had been bailed out by the Government, an official report discloses today.

The National Audit Office, the official spending watchdog, criticises the Treasury for failing to call a halt to the reckless mortgage lending strategy.

The report also reveals that the Treasury was warned three years before Northern Rock almost collapsed that it needed to set up emergency plans to handle a possible banking crisis but did nothing about it.

That meant that when Northern Rock hit the skids, neither the Treasury, the Bank of England nor the Financial Services Authority were prepared for it.

The NAO accuses the authorities of failing to conduct due diligence when they took over Northern Rock, allowing it to continue lending mortgages of up to 125 per cent, while taxpayers' cash was being used to bail out the bank.

The report adds that the Treasury relied on optimistic forecasts that predicted only a five per cent fall in house prices.

The criticism came after it emerged that the Financial Services Authority, the City regulator, predicts that two million homeowners face negative equity this year.