Is the taxpayer about to guarantee your mortgage?

The Government may have to use taxpayer’s money to guarantee billions of pounds of mortgage debt if the housing market is to recover from the credit crunch, a new report has said.

In a report commissioned by the Treasury that looks at ways to revive the mortgage market, the author, Sir James Crosby, said that a shortage of mortgage funding in the UK will persist for years without intervention. However, the option of the government partially guaranteeing mortgages would be controversial, particularly following the nationalisation of Northern Rock.

In recent months, mortgage lenders have tightened their criteria for mortgage lending as well as reducing the number of mortgage products offered to the public.

Sir James who is the deputy chairman of the Financial Services Authority, believes that should the tightening in the mortgage market continue into the long term, the current downturn in house prices and wider consumer spending may deteriorate further.

The Council of Mortgage Lenders (CML) agreed with Sir James’ assessment of the mortgage market, saying that the Treasury should work with urgency on measures to address the mortgage funding gap.

CML director general Michael Coogan commented: “As the Bank of England lending figures today show, the mortgage market remains severely constrained. In aggregate, lenders are unable to meet the consumer demand for mortgages because there is not enough funding available to them. Without action, the situation in the housing market will be worse than it needs to be. The housing correction will overshoot, and the knock-on effects on the wider economy will be significant.

Today’s analysis at last sets down an independent welcome marker that intervention to address the mortgage funding gap is both appropriate and necessary. It creates a clear expectation of measures at the time of the pre-Budget report. We now look forward to working urgently with the Treasury over the summer on proposed solutions.”