Why you should care about UKAR: Britain's must vulnerable mortgage book

Vulnerbale Bradford & Bingley mortgages were bound up with Northern Rock ones as part of UKAR. Credit: PA

UKAR or, more accurately, UK Asset Resolution, was born in 2010 in the depths of the financial crisis.

It is essentially a holding company, a receptacle if you will, for all of the Northern Rock and Bradford and Bingley mortgages that the government decided looked so vulnerable to default that they were unsaleable.

There were quite a lot of them: 750,000 mortgages ended up bundled together into a giant mortgage book.

The big idea was that over time the mortgages would be repaid, homes would (in extremis) be repossessed and, with a fair wind, the taxpayer would recoup much of the £48bn it had invested bailing the banks out.

UKAR was predictably christened a "bad bank" and has therefore, equally predictably, has gone on to do pretty well in a low interest environment.

UKAR is profitable (£1,259m in the 12 months to March), arrears have fallen, fewer homes are being repossessed; in fact 93% of all mortgages are up-to-date with their repayments.

Quite a lot has changed since October 2010, not least the language the chief executive, Richard Banks, uses to describe the business.

Back then the number of people in arrears was "scary"; today the business is "under control".

In the past he has warned that any move to raise in interest rates by the Bank of England would trigger a "tsunami" of repossessions. Today he told me he was "very nervous but we're ready for them".

UKAR has the 7th largest mortgage book in the country and it is the most vulnerable.

UKAR boss Richard Banks. Credit: UKAR

House prices are on the rise again but one in six UKAR mortgages remain in negative equity - that is to say they owe more than their house is worth.

Some 152,000 UKAR homeowners are on interest-only mortgages, so even with interest rates at an unprecedentedly low levels (and only going in one direction) they are servicing their debt rather than repaying it. Some will be doing this through choice, many through necessity.

Richard Banks has been preparing for interest rate rises, which he thinks will begin by the end of the year, by stress testing the remaining mortgage book.

He estimates that if Bank Rate rises by just 1%, 22,000 customers will fall behind on their mortgage repayments.

If interest rates were to return to the pre-crisis level of 5% then 150,000 mortgages would fall into arrears.

The number of mortgages in the bank has fallen to 529,000 and to-date £10bn has been repaid to the taxpayer.

It's daunting stuff but then these UKAR customers are the people who borrowed the most that they could at the top of the market.

They are exposed to any change in monetary policy but Richard Banks says he still expects to settle the outstanding sum of £38 billion owed to the taxpayer "at some point in the next 10 years."