The government should have stopped Northern Rock from offering risky 125 per cent mortgages while the bank received emergency loans, a report has found.

The report from the National Audit Office (NAO) criticised the government for allowing the bank to write over £1.8 billion risky ‘Together’ mortgages between September 2007 and February 2008 while receiving financial support.

More should have been done to test the bank’s initial business plan, the report added.

Importantly, at the time of taking Northern Rock into public ownership, the Treasury had not conducted due diligence, putting taxpayers’ money at risk, the report said.

However, the NAO found the nationalisation of Northern Rock in early 2008 offered “the best prospect of protecting the taxpayers’ interests”.

Tim Burr, head of the government’s spending watchdog, said: “The Treasury successfully met its objective to protect Northern Rock’s depositors and stopped the run on the bank.

“It rightly concluded that the private sector bids for the bank gave insufficient prospect of safeguarding the taxpayer’s interest.

“The Treasury could, however, have conducted a more systematic assessment of the risks it was taking on and more thoroughly tested the bank’s initial business plan in public ownership.”

The Treasury was “stretched” by the crisis and lessons can be learned, the NAO concluded.

Liberal Democrat shadow chancellor, Vince Cable, said: “This report is a damning account of the Treasury’s mismanagement of the Northern Rock crisis.

“The government’s inability to stop Northern Rock issuing high risk Together mortgages even after the bank started receiving state aid is a total disgrace.

“With billions of pounds of public money at stake, the least taxpayers should expect is that basic due diligence of the company’s loan book should have taken place before nationalisation.”

Northern Rock was nationalised in February last year after news of an emergency loan from the Bank of England led to the first run on a British bank since 1866.

After nationalisation, the bank began winding down its mortgage book, although recently the government has given the bank permission to start lending again.

Northern Rock’s controversial ‘Together’ loans, which offered first-time buyers a 125 per cent loan on the value of their home, were available until late February 2008 and were withdrawn after four other lenders scrapped similar deals.

As of December 31st 2008, Together mortgages represented around 30 per cent of the mortgage book but about 50 per cent of overall arrears and 75 per cent of repossessions.