The government has agreed to sell a £13bn collection of former Northern Rock mortgages to a US private equity group.

UK Asset Resolution (Ukar), the zombie bank created to run down the loans in Northern Rock and Bradford and Bingley, said it would sell the loan operation known as Granite as well as a further £1bn of Northern Rock loans to Cerberus Capital Management, which specialises in buying distressed debt. The deal is the biggest sale of financial assets by a European government, the Treasury said.

The loans cover about 125,000 customers owing an average of £100,000. They include Northern Rock’s notorious Together product, which allowed borrowers to top up their mortgage with an unsecured loan to borrow up to 125% of their property’s value. About £1bn of those loans are in arrears.

Cerberus has agreed to sell £3.3bn of the loans to TSB, enlarging the challenger bank that split off from Lloyds Banking Group and is now owned by Sabadell of Spain. The deal means customers will receive letters telling them they have a new mortgage lender.

Richard Banks, chief executive of Ukar, said it could be the first time some customers realise their mortgage was not with Northern Rock. “They will get what we describe as a goodbye letter from Northern Rock Asset Management and a hello letter from Cerberus or TSB,” he said.

Banks said under the terms of the deal Ukar’s mortgage servicing division would continue to manage the loans, adding that it would be “business as usual” with no changes to customers’ terms and conditions. The mortgage servicing division employs about 1,800 people and is up for sale.

Ukar said it expected to repay about £5.5bn of the government’s loan to Northern Rock from the sale and that the proceeds were £280m more than the accounting value of the loans.

Northern Rock used Granite, which was held off the bank’s balance sheet, to fund its lending by parcelling up mortgages and selling them as bonds to investors. The practice, called securitisation, freed the bank’s money for more lending in a virtuous circle that allowed Northern Rock to expand rapidly.



When the credit crunch struck in the summer of 2007, investors no longer wanted to buy Granite bonds, fearing losses on the mortgages contained in the vehicle. That caused a funding crisis for Northern Rock that led the government to nationalise the bank in 2008.

However, with the economy and the mortgage market back in reasonable health, the loans housed in Granite are performing well. The government started a bidding process six months ago that attracted interest from Royal Bank of Scotland, a consortium including Goldman Sachs, and other potential buyers.

Banks said there was lots of interest when the potential sale was announced and that the bidders were whittled down to six in the second round.

Cerberus has snapped up books of loans in the past couple of years, including from RBS, Lloyds and National Australia bank, betting on a recovery in European property markets. It declined to appear at a committee of the Northern Ireland assembly to answer questions about its purchase of £1.2bn of loans from Ireland’s National Asset Management Agency.

Cerberus, named after the mythical multi-headed dog that guarded Hades and prevented the dead from leaving, said it was committed to being a good steward of the loans, but lawyers warned the sale could affect borrowers.

“Changes must be expected as a result of the change in ownership,” said Stephen Rosen of Collyer Bristow. “In Scotland, for example, we have found that Cerberus is tougher in enforcing breaches in covenants.”

The Unite union, which has members at Ukar, criticised the sale for putting UK borrowers’ mortgages in the hands of a US investment firm. The firm has been an enthusiastic investor in firearms and is connected to the Republican party with the former Treasury secretary John Snow and former vice-president Dan Quayle its co-chairmen.

Unite’s regional officer, Brian Cole, said: “It’s alarming to see the mortgages of so many homeowners being sold-off to an equity firm whose only interest is short-term profit. Our members and the thousands of homeowners who rely on us deserve long-term security, yet once again their futures are being placed on the roulette wheel.”

Ian Hares, Ukar’s finance and investment director, said 96% of the loans’ customers were up to date with their repayments and that the average loan to value of the mortgages was 72% with the loans spread across the UK.



Hares and Banks said the healthy state of the Granite loans did not cast doubt on the Labour government’s decision to nationalise Northern Rock. Hares said confidence in Northern Rock had collapsed and banks were too weakly capitalised to cope with the economic downturn.

Banks said many customers faced difficulty repaying their mortgages during and after the crisis: “People lost their jobs and their pay was reduced and all of that brought pressure on customers. The book we have now is a very solid book which we have been able to sell at a premium, which demonstrates the strength of the customer base and the strength of the economy now.”

Ukar was formed in 2010 to be the “bad bank” of loans made by Northern Rock and Bradford & Bingley, which was also nationalised during the financial crisis. The “good bank”, including Northern Rock’s branch network and retail deposits, was sold to Virgin Money in 2011.

George Osborne, the UK chancellor, said: “We are now clear that taxpayers will get back more money from Northern Rock than they were forced to put in during the financial crisis. The highly competitive process, unprecedented scale, and the fact that these mortgages have been sold for almost £300m more than their book value demonstrates the confidence investors have in the UK.”