Fears that taxpayers may end up footing an even bigger bill for Northern Rock intensified yesterday after it emerged that the nationalised bank was suffering dramatically high default rates.

Northern Rock borrowers falling more than 90 days behind on mortgage payments were rising at much faster rates than the overall mortgage market, Standard & Poor's (S&P) said. Repossessions of Rock mortgagees were also rising at a far higher rate.

The problem was identified in Granite, the £40 billion offshore trust that holds many of Rock's mortgages and provides monthly performance figures to its bondholders.

Granite was performing substantially worse than similar securitisation vehicles set up by Barclays, HBOS, Abbey, Alliance & Leicester and Standard Life, S&P said.

Andrew South, S&P's senior director for structured finance, said that any financial pain of a major blowout in defaults would be shared between Granite bondholders and Rock. “The deteriorating book increases the chances that taxpayers, ultimately, might have to shoulder some of the cost,” he said.

Arrears of 90 days or more in mortgages held by Granite soared by two thirds between this year's first and second quarters, with £508 million of loans turning sour. By contrast similar trusts run by rival banks saw relatively small increases in delinquencies in the quarter, S&P noted.

Repossessions of properties in the Granite porfolio soared from 134 a month in the first quarter to 353 a month in the second, again a much worse deterioration than in the industry generally.

S&P also alerted investors to another potential risk of mortgages in Granite. Average loan-to-value ratios (LTVs) were 77 per cent for Granite, as against 60 per cent typically in other trusts. Just under 30 per cent of Granite loans were at LTVs of 90 per cent or more. That means a large proportion of borrowers would be in negative equity if house prices fall further.

A Rock spokesman said: “At this stage Granite is performing within its parameters. Investors [bondholders] are well aware of this and are protected by the reserve fund [a cushion that protects bondholders in the event of default].”

The spokesman said that the arrears figures in Granite were consistent with figures issued by Rock with its half-year results on August 5. At the time, Rock said that arrears levels, including Granite loans, had doubled since the start of the year to 1.18 per cent of the total residential mortgage book. Repossessions were up from 2,215 at the start of the year to 3,710.

On top of the £40 billion Granite book, Rock holds £37 billion of mortgages on its own balance sheet, which it says are of similar quality to Granite's loans.

S&P said that Granite's relatively poor performance on credit quality remained even after allowing for the fact that it was shrinking its book as mortgages matured or borrowers took their business elsewhere. The Granite book is down from £46 billion at the start of the year.

Rock suffered a cataclysmic depositor panic last September, forcing the Government to guarantee deposits and later to nationalise it after failing to orchestrate a private sector rescue.

It emerged this weekend that at the time of the nationalisation, in February, when the Government was assuring voters that Rock could ultimately be sold back to the private sector for a profit, it was being privately advised by Goldman Sachs that the saga was most likely to lead to a loss of between £450 million and £1.28 billion.

Since being nationalised, Rock has repaid £9.4 billion of government loans, reducing its outstanding debt to £17.5 billion. It is negotiating with the Treasury to swap up to £3 billion of government loans for fresh equity to strengthen its balance sheet.

Granite’s role

— Granite is a special-purpose vehicle set up in 1999 by Northern Rock in Jersey. It was used by Rock to make extra cash from the mortgages that the bank had sold to homeowners

— Northern Rock transferred mortgages to Granite, which packaged them together. Investors bought these securities, which provided them with regular interest payments

— Rock does not own or run Granite, which is a separate legal entity

— Many other banks have these vehicles, including Halifax, Bank of Scotland and Barclays. They are particularly common in the United States, where almost all mortgages are held within special-purpose vehicles similar to Granite

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