Rock set for jump in mortgage arrears

Northern Rock is more than doubling its debt-management staff in the next year to cope with an expected jump in arrears as the economy heads into a downturn.

The nationalised bank's team for managing accounts in arrears and chasing payments will increase from 176 at the end of last month to 444 by the end of next March before reducing to 282 by December 2011. Northern Rock warned earlier this month that mortgages in arrears by three months or more had risen to 0.95 per cent of its loan book at the end of March from 0.57 per cent at the end of 2007.

The increase was partly due to the shrinking size of the balance sheet as the bank encourages customers to redeem their mortgages and go elsewhere.

The increase is one of the measures imposed by Ron Sandler, the bank's executive chairman, to strengthen processes and controls at the bank, which expanded rapidly during a 10-year period when bad debts were not a major issue.

Mr Sandler wants to roughly halve the size of Northern Rock's loan book so that the Bank of England's £24bn of loans can be repaid and the bank can be returned to the private sector. To do this, customers have to find new deals elsewhere and Mr Sandler has admitted that Northern Rock could face "adverse selection" as the best customers are welcomed by rivals, leaving riskier borrowers behind.

The bank is strengthening its debt management team amid a flurry of gloomy news for the housing market. Nationwide, the country's biggest building society, said on Wednesday that prices fell 2.5 per cent in May, the biggest monthly drop since 1991. Moody's, the ratings agency, warned on Thursday that mortgage lenders faced sharp rises in bad debts as it stamped a "negative" outlook on the UK banking sector.

Mr Sandler told MPs earlier this month that annual house-price falls of 5 per cent or more could put strain on his plan, which is at the mercy of macroeconomic developments.

The plan to increase the debt management team was released to the bank's staff along with details of an expected cut of 2,000 in the company's workforce of 5,500 full-time employees. The memo was sent as part of the bank's efforts to keep staff informed about its consultation process with unions.