House price fears hit Rock sale

The rescue of the bank by one of its potential suitors is dependent on them being able to secure funding of between £10 billion and £15 billion from investment banks such as Citigroup, Deutsche Bank and Royal Bank of Scotland.

But these groups are said to be increasingly reluctant to secure their loans against Northern Rock's mortgage assets in the face of falling house prices, according to the Sunday Telegraph.

It reported that although the bulk of Northern Rock's mortgages are good quality, the Treasury is insisting banks take a "slice" of its entire mortgage book as collateral, and this would include some lower quality loans.

As a result, banks are having to re-value Northern Rock's assets to reflect the fact that house prices could fall and mortgage arrears are expected to rise.

Banking sources close to proceedings told the newspaper that the deterioration in the housing market had made it harder to value bits of the mortgage book.

Since the problems at Northern Rock first emerged in September, the long-awaited slowdown in the housing market has finally materialised, with most indexes now reporting falls in property prices on a monthly basis.

At the same time, the Council of Mortgage Lenders has predicted that the number of people falling behind with their mortgage will soar by 50% during 2008 to 45,000 - a level not seen since the 1990s house price crash.

Around 10% of the mortgages on Northern Rock's book are now thought to be of higher risk, the Sunday Telegraph said.

A consortium led by Sir Richard Branson's Virgin and the Olivant investment group are both vying to take control of Northern Rock. But it is feared that funding problems could jeopardise these rescue bids, increasing the likelihood that Northern Rock will have to be nationalised.