The Treasury came under heavy fire yesterday for allowing Northern Rock to continue to extend 125 per cent mortgages long after the bank was forced to seek Government help.

A National Audit Office report criticised Northern Rock for continuing the use of controversial mortgages, under which customers could borrow up to 25 per cent more than the value of the property they were buying, after the Government rescue.

After the bailout in September 2007, Rock lent a further £800 million to thousands of borrowers through its Together mortgages, many of which have subsequently gone bad, with many more borrowers falling into arrears or being repossessed. Rock finally closed Together to new borrowers in February last year when it was nationalised.

While approving the ultimate decision to nationalise the bank as the best way of protecting taxpayers, the wideranging report criticised the Treasury for a string of other failings going back to 2004. It accused Mr Brown’s then department of being aware of shortcomings in the procedures in place to grapple with a future bank collapse in 2004, but deciding not to make improvements in that area a priority.

The Treasury was also criticised for failing to commission due diligence on Rock and the quality of its loan book before nationalising it and for failing to challenge rigorously enough its overoptimistic assumptions about future trading conditions.

Rock’s central expectation was that house prices would fall by only 5 per cent between 2008 and 2011, at a time when outside independent forecasters were predicting much larger falls. Within months that view was shown to be excessively optimistic when Rock reported a half-year loss of £585 million, £314 million worse than its earlier projection.

Opposition MPs seized on the report — the first detailed independent assessment of the Treasury’s performance in rescuing and nationalising the bank — as evidence of government incompetence.

Vince Cable, the Liberal Democrat Treasury spokesman, accused Gordon Brown of having his head in the sand in 2004 when he was Chancellor. “Ministers failed to listen to any of the warnings about the brewing storm,” he said. “This report is a damning account of the Treasury’s mismanagement of the Northern Rock crisis. The Government’s inability to stop Northern Rock issuing high-risk Together mortgages even after the bank started receiving state aid is a total disgrace.”

Philip Hammond, for the Conservatives, said: “The Government were made aware of the Treasury’s inability to handle this in 2004 but amazingly did nothing to rectify the situation — something which could have saved the taxpayer a lot of hardship.”

Edward Leigh, chairman of the Public Accounts Committee, said that he was troubled by some of the NAO findings. “While depositors were queueing 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 per cent 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?”

Mr Leigh also attacked the Treasury for sitting on its hands in 2004 in spite of discovering that it was not well equipped to deal with the failure of a financial institution.

The Treasury said it would study the report and provide a detailed response at the Public Accounts Committee hearing on March 30. “We note that overall the report finds that the Treasury was right to take the decisions it did to protect the interests of taxpayers and to promote stability in the financial system.”

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