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An offshore fund with charitable status to raise money for Down’s syndrome sufferers in the North East has emerged as the first potential barrier to the smooth nationalisation of Northern Rock.

The fund, called Granite, owns £49 billion of mortgages that were sold by Northern Rock and moved off-shore to the tax haven of Jersey. Granite, which was set up by Northern Rock to raise cheap money, sold bonds to investors and used the proceeds to issue new mortgages.

But The Times understands that the fund could be in danger if Northern Rock fails to win the new mortgage business needed to keep Granite running smoothly. One source said last night: “If you stop writing new mortgages then Granite dissolves and you have to pay back all the Granite bonds, so that would be the Government shooting itself right in the foot.”

It is understood that if Northern Rock does not keep supplying Granite with new mortgages, the trustees of the fund could call for a “rapid amortisation” of Granite, which would require bondholders to be paid back in full. In that instance it is believed that neither Northern Rock nor the Government would be liable to return the funds. However, at least £6 billion of Granite’s money is understood to have been invested directly into Northern Rock, meaning that the bank — or the Government after nationalisation — would have to repay this debt immediately.

Granite dominated a parliamentary debate on the legislation needed to enable the Government to nationalise the stricken bank yesterday. Liberal Democrat and Conservative MPs demanded that Granite, although a separate company to Northern Rock, be brought into public ownership as well. They fear that Northern Rock has transferred its best mortgage assets to Granite, leaving the Government’s estimated £25 billion loan to the bank secured only on riskier lending. Alistair Darling, the Chancellor, said that there would be no benefit to the taxpayer in bringing the trust into public ownership and its existence was no barrier to the sale of the bank. He added that the bank owned no shares in Granite and the Government had provided no guarantees to its bondholders.

Mr Darling also hit back at suggestions that the taxpayer had been handed the “rubbish” assets of Northern Rock and the best had gone elsewhere. He said that its balance sheet included high-quality mortgage assets.

The Chancellor’s assurances appeared last night to have saved the whole Bill from possible defeat after a meeting with Vince Cable, whose Lib Dem support is vital to its passage, and appeared to have placated him.

The issue overshadows Gordon Brown’s official visit to Brussels today. He is to lunch with leading EU officials including Neelie Kroes, the Dutch Commissioner in charge of deciding whether the imminent business plan for Northern Rock is lawful.

Northern Rock sold half its mortgages to the Jersey-based trust to fund its expansion, including some of its profitable and high-value loans. But the arrangement was suspended when the Government stepped in to rescue the bank — and Mr Darling said that it would be up to Ron Sandler, the man appointed to run Northern Rock, to decide whether it should continue.

Mr Cable wrote earlier to Mr Darling demanding to know why Granite was not being nationalised. He accused the Government of supporting an “asset-stripping” operation and threatened to withdraw his party’s support for nationalisation. Mr Darling emphasised that Granite was entirely independent of Northern Rock, that its mortgage book was “of good quality and its assets exceed its liabilities”, and that Granite had no claim on the bank’s assets. Even so, ministers face a trial of strength with peers as the Tories and Liberal Democrats insist on greater safeguards to stop Northern Rock from undercutting other banks and building societies. They will also demand greater parliamentary oversight of the bank’s strategy and call for it to be subject to freedom of information laws.

Labour peers were being urged by government whips to attend the Lords and be ready to sit late into the night if Mr Brown uses his Commons majority to overturn defeats in the Lords in a bout of parliamentary “ping pong” between the two Houses.

Lord Lawson of Blaby, the former Chancellor, said that the Rock should be closed to new business and its mortgage book sold off when market conditions improve. He said the Government had chosen to continue running it as a business because it was “sensitive about feelings in the North East”.

Hard facts

What is Granite?
Granite is a company set up in 1999 by Northern Rock in the offshore tax haven of Jersey. Its technical name is a special purpose vehicle. Granite was used by the Rock to make extra cash from the mortgages that the bank had sold to UK homeowners. Northern Rock transfers mortgages to Granite, which packages them together to make a financial instrument called a security. Investors buy these securities, which provide them with regular interest payments.

How does Granite operate?
Granite uses the interest payments made by the mortgages that it obtained from Northern Rock to cover its payments to the investors. Some of the money that the investors paid for the securities is passed from Granite to the Rock. As people pay off their mortgages regularly, the Rock must keep supplying Granite with new mortgages so that Granite has enough cash to cover its interest payments to investors.

Do other banks have these companies?
Many other banks have these vehicles, including Halifax, Bank of Scotland and Barclays. It is particularly common in the US, where almost all mortgages are held within special-purpose vehicles such as Granite. Northern Rock has two other offshore companies, called Dollarite, which holds some of the loans that the Rock has sold to businesses, and Whinstone, a much smaller vehicle.

Who owns Granite?
Although the Rock has a legal responsibility to provide Granite with regular infusions of mortgages, it does not own or run the vehicle. They are separate legal entities. In theory the vehicle is owned by a charitible trust that was set up to raise money for a Down’s syndrome charity in the North East.

Why is it causing such concern?
There are fears that Northern Rock has moved its least-risky mortgages to Granite, leaving the most risky lending on its own balance sheet. Because Granite is a separate company, if the Rock defaulted on its estimated £25 billion government loan, the Government would not be able to access Granite’s mortgages to sell to pay off the debt. If no new mortgages are put into Granite, the bondholders will have to be repaid.

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