Today's Financial Times reports that mortgage lenders in England were warned by the UK's Financial Services Authority (FSA) on Tuesday to brace for "very difficult" market conditions next year as at least 1.4 million homeowners face a sharp jump in loan repayments.

The FT cites three reasons why concern is growing regarding the stability of some smaller UK mortgage lenders: the collapse of Northern Rock (LSE: NRK), the slowdown in the housing market and rising lending rates between banks.

The same article quotes the FSA as prognosticating that there is "a very real prospect that conditions will worsen further into next year, in terms of both liquidity and credit risks."

Perhaps there are not enough good opportunities to "cherry pick" assets among U.S. mortgage lenders, so U.S. buyout firms Cerberus and JC Flowers have gotten approval to deal with the board of Northern Rock (LSE: NRK), the large and troubled U.K. mortgage bank.

The two funds would probably take different approaches. Flowers is interested in having Northern Rock continue to operate, but perhaps with many fewer employees. Cerberus is interest in the bank's assets, which it believes it can get at a discount and then sell off to other institutions.

According to The Telegraph, British authorities "have said Northern Rock is solvent, but sources close to the restructuring warn that it is living on borrowed time."

A buyout of Northern Rock could be a trial for whether similar deals could work in the U.S. There is little hope that the U.S. mortgage market will be better this year and may even stay depressed into 2008. Banks like Accredited Home Lenders (NASDAQ: LEND) are still not out of the woods. And, private equity and hedge fund interests may be the only buyers left for some of these companies.

Douglas A. McIntyre is a partner at 24/7 Wall St.

In a stunning move this morning, Reuters reports that the Bank of England is bailing out England's Northern Rock plc (LSE: NRK), which had the biggest share of the UK new mortgage market in the first half of 2007.

The strange thing about this bailout -- in the form of an unspecified emergency loan from England's version of the U.S. Federal Reserve -- is that Northern Rock forecasts a profit for 2007. Specifically, it now expects 2007 pretax profit $1.1 billion, albeit 23% below analysts' current consensus forecast.

Given this expected profit, why would Northern Rock need a bailout? The mortgage company depends on wholesale financing as the source of cash to lend out to borrowers. And given the weak state of the market for buying packages of mortgages it and its peers originate, it appears that Northern Rock faced a short-term liquidity crisis. The funds it's receiving are at a higher, penalty, interest rate.

NRK shares, already down 50% in 2007, plunged a further 20% in early trade. If there's anyone who knows how wide and deep the problems lie in the shaky global financial network built on mortgage-backed securities, they're not saying.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.