One in five Northern Rock mortgage customers could face negative equity in the coming year as house prices fall.
Meanwhile one in 20 already owe more on their home loan than the value of their property already.
The Telegraph reports the nationalised bank's interim results will show the poor state of its mortgage book.
The problem arises as Northern Rock tries to encourage customers reaching the end of fixed-rate deals to remortgage elsewhere.
However, those customers who originally took high value mortgages with Northern Rock at one time offering loans of up to 125 per cent of the value of a property are finding it hard to remortgage in the credit crunch without high levels of equity behind them.
The result is Northern Rock is left with mortgage customers no-one else wants and the quality of its mortgage book is eroding.
Northern Rock executive chairman Ron Sadler admitted this risk when giving evidence to the House of Commons Treasury select committee.
He added: "There is such a risk [we will be left with the mortgage customers no other lender wants].
"There is no question that those customers who represent the better credit risks find it easier to get good alternative products elsewhere.
"And those that are perhaps poorer risk find it more difficult but we do expect over time that is going to increase the risk of our book."
The £27 billion loan from the Bank of England is now expected to be repaid by 2010, with 25 per cent returned by the end of the year.
By 2011 the Novocastrian mortgage lender is expected to break even and then move into profitability.
Last week, the bank announced 1,300 redundancies in its bid to scale back its size.