Dealing with the wreckage left by Northern Rock

The body in charge of clawing back taxpayers’ money from bad loan books is facing headwinds

What does £38.3bn get you these days? An imaginary spender with unfathomably large pockets could buy up everything produced by the Chilean economy in a single year. He could pay the UK's entire annual defence budget. Or - if he really wanted to - snap up Tesco, Sainsbury's and Morrisons and still have change for a desert island.

The vast sum is still owed to the taxpayer by UK Asset Resolution, the bad bank containing the dodgy loan books of crisis casualty Bradford & Bingley, and the bits of the nationalised Northern Rock left over after Virgin Money plucked out the healthier parts from the wreckage.

The job now of UKAR - which brought the two businesses under one umbrella in October - is clawing back the public money by winding down the loan book. People selling their homes or remortgaging with another lender pay the money back to UKAR, which in turn can gradually refill the Treasury coffers. It had 529,000 mortgage customers at the end of March, down nearly 60,000 on the previous year. The total loan book has fallen to £61.2bn: of these, £11.6bn are Northern Rock's notorious Together mortgage loans, under which the doomed lender would offer borrowers up to 125 per cent of the value of their homes.

So far, the company, led by chief executive Richard Banks, has repaid £10.4bn. The good news is that a recovering housing market has cut the level of mortgage arrears by 35 per cent, to £121.2m, since the end of 2012.

Virtually half of the £10.4bn - £5.1bn - has been paid back in the past year as the pace of mortgage redemptions picks up, although the company also paid £1.1bn to the Government in interest on its loans, tax, and the fee for its state guarantees. And only 7 per cent of their customers are three months or more in arrears.

The bad news from Mr Banks is that we could be waiting a lot longer for the rest of the money. “The mantra I use on this is that we expect to fully repay all the remaining £38.3bn within the next 10 years. The reason I don't say it will be on the third Tuesday of March 2024 is that it is subject to a lot of variables, not least the pace of mortgage redemptions.”

That brings us to the next bit of bad news. As the economy's recovery picks up pace - and interest rates rise - the rapid pace of UKAR's own repair will slow.

Mr Banks is braced for a huge rise in customers struggling to keep up repayments, potentially dragging more than 60,000 of its customers into trouble. Threadneedle Street is expected to begin raising rates from the historic lows of 0.5 per cent in February next year with official borrowing costs likely to settle at about 3 per cent in a few years' time.

“If interest rates rose by 1 per cent then a further 22,000 customers - about 7 per cent of the customer base - might struggle or go to into arrears. You could probably multiply that by three if interest rates went to 3 per cent. It is a very real concern to us that interest rates rise rapidly and significantly.

”We know the customers who've definitely got problems because they're in arrears. The trick is trying to work out which customers may be in problems when interest rates rise. We are starting a programme of contacting customers we think may be most at risk.“ That group includes those on interest-only mortgages, people who are still borrowers heading into retirement and customers who mortgaged themselves up to the neck when they took out their original loan.

Despite these headwinds, UKAR could ”accelerate“ repayments amid rising interest in its loan book. UKAR has sold off almost £1bn in personal and mortgage loans in the past two years: more deals seem likely if the price is right. ”We get lots of enquires, but we aren't in the market for selling assets at discounts. There is no point in selling fully-performing assets at a discount. These are customers who have gone through the most difficult recession of the last 100 years and have come out still paying their mortgage and paying a standard variable rate of 4 per cent. It's difficult for me to contemplate selling for less than 100p in the pound.“

The operation's ultimate aim is to put itself out of business, but Mr Banks is also considering a new future for a company with 2,200 staff. Having spent £180m-plus on putting the businesses together, he is considering options to sell the infrastructure, ”possibly“ to another bank - although the primary focus is still to repay the taxpayer. A float is a non-starter and writing any new business would flout state aid rules. He said: ”We are expert in mortgage service provision and we are expert in debt management and collection activity.“

Mr Banks adds: ”This business ultimately will close its doors if we do nothing. In 20 years' time somebody will be there, switching the lights off as the last mortgage has been repaid. The question is whether we should do something different with the operation.“ Out of the worst wreckage of the credit-crunched banks, an unlikely future beckons.

Timeline: The bank bailouts

18 February 2008 Northern Rock nationalised

17 September 2008 Lloyds TSB announces £12bn HBOS merger

29 September 2008 Government pays £24bn for Bradford & Bingley mortgage book while Santander takes over B&B’s 197 branches and £20bn deposits

13 October 2008 Government pumps in £37bn to shore up RBS, Lloyds and HBOS banks

25 March 2014 Government raises £4.2bn by selling part stake in Lloyds Banking Group