On the face of it, Northern Rock is suffering significantly higher delinquencies on its mortgage lending than the industry average. According to yesterday’s 2008 results preview, residential loans more than three months in arrears were 2.92% of the total number of loans at the end of December, which compares with an industry figure of 1.87% (reported by the Council of Mortgage Lenders last week).

The Northern Rock number, however, has been inflated by its policy of encouraging borrowers to refinance their loans with other lenders. The number of mortgages in the Granite pool fell by 30% during 2008, a figure likely to be representative of the bank as a whole. With other banks tightening lending criteria, only Rock’s more credit-worthy customers will have been able to refinance elsewhere and it is reasonable to assume that most of these borrowers have continued to service their loans.

Accordingly, when comparing Rock’s arrears performance with the industry average, it may be more appropriate to express the number of cases as a proportion of the total including those who have moved to other lenders, i.e. the number at the end of 2007 rather than 2008. Adjusting for a 30% fall, this reduces the three months plus arrears proportion at the end of December to 2.05% – only slightly higher than the industry figure.

One way of moving borrowers off arrears is to repossess their homes. Properties accounting for 0.66% of the loans in the Granite pool at the end of 2007 were repossessed during 2008, which compares with an industry repossession rate of 0.34% last year. Northern Rock has therefore contained the rise in its arrears proportion by a relatively aggressive repossessions policy but the effect has not been large.

Arrears nationally are likely to continue to rise rapidly during 2008 – see here – and it is possible that Northern Rock’s relative performance will deteriorate more significantly in the process. Its rapid expansion during the late stages of the boom and an above-average loan-to-value ratio are reasons for pessimism but Rock avoided subprime lending and – unlike Bradford & Bingley – has limited exposure to the buy-to-let sector, where arrears are rising more rapidly.

Earlier posts on Northern Rock can be found here and here.