Northern Rock reported a jump in losses during the first half of the year. The number of bad loans held by the bank, which is 100% owned by the state, tripled in six months.

The £724 million ($1.2 billion) pre-tax loss represents a rise of 24% on the £585 million deficit the bank reported at the same time last year.

Northern Rock also revealed that 3.92% of its mortgages were in arrears, with people falling behind on their repayments by three months or more. The national average of mortgages in arrears is 2.39%, according to the Council of Mortgage Lenders.

AssetCo would hold the balance of the existing residential mortgage book. The vast majority of the mortgages are performing, including the firm’s interest in the loans allocated to the Granite securitization and covered bond programs. It would also hold the existing government loan for Northern Rock, including Northern Rock's non-deposit wholesale funding instruments.

The proposed structure offers the most capital efficient solution. There is an additional capital requirement, for BankCo and AssetCo combined, of no more than £3 billion. Once the restructuring and capital injection are completed (which is subject to the European Commission's (EC) approval), Northern Rock said it planned to increase its new lending.

“Northern Rock anticipates that state aid approval will be obtained from the EC during autumn 2009, which will enable the legal and capital restructure and recapitalization of the company to be completed before the end of the year,” said Gary Hoffman, Nothern Rock's chief executive. “The restructuring of the company is progressing in a satisfactory manner and will ultimately enable a return to the private sector.”

In Ireland's version of bad bank for commercial loans, the Irish government has set up its bad bank, the National Asset Management Agency (NAMA) that plans to buy up to €90 billion ($129 billion) of impaired commercial property loans from Irish lenders.

The government said it will not engage in “fire sales” of up to €25 billion large property holdings it could control in the U.K. The statement addresses concerns that it would opt to offload loan assets in the U.K. and focus on the clean-up of their domestic commercial mortgage and property markets.

Barclays Capital analysts said that NAMA’s “crucial” goal is to stop fire sales that would damage both the Irish banks and the country's economy.

However, although the current law allows NAMA to extend its temporary mandate, it did not specify the discount or haircut NAMA plans to pay eligible banks for their distressed property loans.

“We remain skeptical on NAMA’s assurances for two reasons," Barclays analysts said. They expect that NAMA will offer to buy U.K. loans at a relatively larger discount than Irish loans since for Irish taxpayers, there is probably better long-term value for properties located in Ireland versus the U.K. The costs to Irish taxpayers might also be very high both fiscally and politically to carry both Irish as well as U.K. commercial mortgage loan losses.

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