Page last updated at 17:50 GMT, Monday, 24 November 2008

New mortgage lending 'to shrink'

Terraced homes
The report was commissioned to look at the mortgage market

A review panel will be set up to monitor lending to householders and businesses, the chancellor announced in the pre-Budget report.

Alistair Darling's move comes as a report by Sir James Crosby recommended that the government provide a guarantee for billions of pounds of lending.

If the government did not intervene in the market, new mortgage lending might shrink in 2009, Sir James warned.

Major lenders have agreed to a three-month window to avoid repossessions.

The big lenders said, in the coming year, they would wait at least three months after householders started falling into arrears before initiating proceedings - although most already do this.

Crosby report

Former banker Sir James Crosby was commissioned by the Treasury to look at ways of reviving the mortgage market.

5% deposit - down from 1,126 deals to 35
10% - down from 1,152 to 66
15% - up from 198 to 228
20% - down from 216 to 189
25% - down from 449 to 421

His interim report, published in July, outlined a series of possible measures from which he has drawn his latest recommendations.

The leading proposal is for the government to directly intervene with a "large injection of funding" into the banking system.

He is calling for a temporary guarantee with taxpayers' money of new mortgage-backed securities - the bundles of home loans sold on by banks to investors to fund fresh lending.

Without such intervention net new mortgage lending - gross new home loans minus repayments and redemptions - would fall below zero in 2009 and see only a modest recovery in 2010, he said.

In 2007, new net mortgage lending stood at 108bn.

"No new net mortgage lending across a full calendar year would be unprecedented and is likely to be associated with further weakness in consumer spending and an increase in unemployment," he said in the report.

"In the housing market it is difficult to see why this would not also involve further house price falls and fewer housing starts."

He said that an auction of 100m of guarantees would improve the availability of mortgages, stimulate the housing market and avert the risk of "protracted fall" in house prices.

Sir James also called for more transparency in the market for these home loan bundles.

The chancellor said in his pre-Budget report that approval from the European Commission and "some technical and practical considerations" would need to be resolved.

A scheme based on his recommendations will be drawn up with a further report expected by the time of the full Budget, Mr Darling said.

Sliding market

He also said that the major lenders had agreed, in the coming year, to avoid repossessing people's homes within three months of mortgage holders getting into arrears. However, most major mortgage providers normally keep to this as a guideline.

Mortgage application form
Low-deposit home loans have all but disappeared from the market

There were planned extensions to a scheme that assists people with repayments if they lose their jobs. The mortgage limit on this programme would rise from 100,000 to 200,000, Mr Darling said.

The government will ask the industry for views on whether to start a new tax-free savings scheme to help first-time buyers build up money to pay a deposit.

Industry group, the Council of Mortgage Lenders (CML), gave a guarded welcome to the plans.

"Everything announced today is helpful, if modest. But it is vital to recognise that not all lenders are the same, and not all have received support from the government's interventions in what remains a very difficult financial and economic environment," said CML director general Michael Coogan.

The proposals come as low-deposit home loans have all but evaporated from the market, with banks unwilling to lend to people considered more at risk of missing mortgage repayments.

Figures from financial information service Moneyfacts, released earlier this month, showed that only 66 mortgage deals were left to choose from, for those offering a 10% deposit. This compared with 1,197 nine months earlier.

Some mortgage brokers have suggested that these deals would not return until house prices stopped falling.

The housing market has seen a dramatic contraction, with prices set to end the year between 15% and 20% lower than the beginning of 2008.

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