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Northern Rock is set to become a major player in the mortgage market again a year after falling into nationalisation, as part of the government's efforts to stimulate lending.
The Treasury announced this morning that it is ditching the plan for Northern Rock to reduce its customer base drastically and repay its debts to the taxpayer by 2011. Instead, it is likely to increase its loans to homeowners and take on more workers – only months after making a quarter of its staff redundant.
Sources had already said that ministers were keen to use the Newcastle-based lender as a "good bank" to drive mortgage lending, which has plummeted in recent months as the economy shrank and house prices fell. The Treasury confirmed today that it has taken the first step – halting the push to drive existing borrowers away.
"Northern Rock is no longer actively pursuing a policy of rapidly reducing its existing mortgage book," the Treasury said.
Northern Rock's original business plan was drawn up by chairman Ron Sandler when he took control of the stricken firm a year ago. Alistair Darling explained that it was no longer appropriate, at a time when other banks and building societies are reluctant to offer mortgages.
"In the current climate, asking people to move their loan elsewhere is not the right thing to do," the chancellor told a Downing Street press conference.
Last year Northern Rock made around 1,500 people redundant, leaving it with 4,500 workers, and until today it had been aiming to reduce this to 4,000 through natural wastage.
"We are reviewing our business plan with the Treasury at the moment," said a Northern Rock spokesman. "If we decide to increase our activity in one sector we might require more staff in that area."
The U-turn means it will take Northern Rock longer to repay the £27bn it borrowed from the Bank of England after the credit crunch struck. Darling said that Northern Rock was still ahead of its repayment schedule.
It is unclear whether customers who fall behind with their repayments will be helped by the change of policy.
It emerged last November that Northern Rock's repossession rate was three times the industry average, something seen as evidence that it was racing to cut its loan book. The Northern Rock spokesman, though, insisted that there was no change to its policy on repossession. "It is absolutely our last resort," he said. "It's not in our interests to repossess."
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