Plan to lift British mortgage market considered

British banks could be allowed to swap new mortgages for government debt to revive the mortgage market, a government-sponsored…

British banks could be allowed to swap new mortgages for government debt to revive the mortgage market, a government-sponsored report indicated today, but the creation of Fannie Mae-style finance firms is unlikely.

The report, by James Crosby, former chief of the HBOS bank, also warned that mortgage markets are likely to remain bunged up for years to come with mortgage lending falling sharply and an inevitable knock-on effect for consumer spending.

Final recommendations from the report, commissioned in April, are expected before the government's pre-budget report later this year, and speculation is growing that an effective government underwriting of all mortgage lending is on the way.

That would extend an existing scheme, introduced by the Bank of England in April, which lets banks swap hard-to-shift mortgage assets for government debt at a price and only if the mortgages were on their balance sheets at the end of 2007.

"I am looking with some urgency at the full range of options identified by market participants for stimulating the supply," Mr Crosby said in the report.

"This will best be achieved through the return of significant new issuance of mortgage-backed securities, albeit not necessarily at anything approaching the rate of issuance seen in 2006 and 2007."

"We are also considering whether ... the possibility of the government guaranteeing (on commercial terms) the principal and interest on high-grade tranches of new mortgage-backed securities may still be necessary."

Vincent Cable, a former economist who is now treasury spokesman for the minority Liberal Democrats, told BBC radio that the idea of the government safeguarding all bank lending was "very worrying".

"It could have the effect of simply reflating this housing bubble that is now bursting in a rather painful way," he said, noting banks currently take a financial hit on the value of their mortgage assets when swapped under the BoE's scheme.

"Any guarantee scheme entered into, there would have to be a similarly very high price to protect the taxpayer - that would be the absolute basic minimum," he said.