NORTHERN Rock today announced losses of £585.4 million for the first half of this year as the number of customers falling behind with mortgage payments jumped sharply.

The recently-nationalised lender said its bad debts provision stood at £351.8 million as 1.18% of its mortgage book slipped to more than three months in arrears at June 30 - more than double the amount at the end of 2007.

But the former bank said it had managed to repay £9.4 billion of the Bank of England loans, taking the amount owed at the end of June down to £17.5 billion.

Northern Rock's executive chairman Ron Sandler said: "The external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses."

Northern Rock said the number of properties in its possession jumped from 2,215 at the start of the year to 3,710 at the end of June.

In a further sign of customers finding it harder to make ends meet, the lender also said it was increasing staff numbers in debt management from 185 to around 500.

Before running into funding problems last summer, Northern Rock was one of the UK's biggest and most aggressive mortgage providers, advancing loans worth as much as 125% of home values.

But with house prices estimated to fall by up to 20% by the end of next year, tens of thousands of its customers could be left in a position of negative equity - where the value of the mortgage exceeds the house price value. That could make it difficult for them to find other sources of finance.

Northern Rock was nationalised in February after the Government failed to find a buyer for the business that provided "sufficient value for money to the taxpayer".

Under a recovery strategy outlined earlier this year, Mr Sandler promised to repay the Bank of England loans by the end of 2010.

He also planned to halve the balance sheet to £50 billion by the end of 2011 by stopping all business lending and accelerating mortgage redemptions for existing customers, and warned of "significant losses" for the lender in 2008 as the credit market turmoil continued.

Northern Rock had 662,000 mortgage accounts at the period end, compared to 777,000 at the end of 2007. Loans and advances to customers have reduced by £14.5 billion in the first half of the year to £84.4 billion.

Mr Sandler said today the £9.4 billion repayment of Government loans so far was "well ahead" of its target.

"This strong performance reflects the company's success in redeeming loans in the first half of the year," he added.

As a result of the deterioration in market conditions, the Treasury has committed to a strengthening of Northern Rock's capital base, mainly through converting £3 billion of outstanding debt into equity.

Mr Sandler said: "These actions to be taken to improve the regulatory capital position of the company will not change the Government's net cash exposure to Northern Rock.

"We continue to envisage that the Government loan facilities will be repaid before the end of 2010."

In the first six months of this year Northern Rock's gross residential lending was £1.9 billion, compared with £17.4 billion during the same time last year and reflecting the lender's scaling down of its balance sheet.

Northern Rock said: "The level of new lending is expected to increase modestly in the second half of the year, while remaining significantly below the company's historic levels."

Residential mortgage redemptions so far this year totalled £15.2 billion, compared with £7.4 billion in the first half of 2007.

The lender's level of retail deposits grew by £3.7 billion over the period, to stand at £14.2 billion, but was still "substantially below" prior year levels.

There was a big jump in the proportion of mortgage customers between three and six months in arrears during the six months. The figure was 0.85% at the end of June, compared with 0.2% at the end of last year.

Northern Rock said the increase in properties in possession was "in line with the company's policy of rapid movement towards recovery where it is clear the borrower will not maintain payments".

Earlier this year, Chancellor Alistair Darling urged lenders to do more for hard-pressed householders as they struggled with tighter credit availability and soaring household bills.

Northern Rock said last week that it was to make around 1,300 redundancies as part of its efforts to shrink the business. The job cuts relate to previously announced plans by the Newcastle-based business to cut 2,000 staff by 2011.

Mr Sandler said: "This has been a challenging process, and inevitably one which is highly unsettling for the organisation. Nevertheless, the company remains on track to conclude this process and achieve the necessary reductions in line with the plan."

He added: "While the losses reported today are likely to continue as the restructuring proceeds and as the credit environment remains difficult, I am confident that the foundations have been well laid for recovery and return in due course to private ownership."