Mortgage guarantee option still on table: UK report

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 Bnak 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," 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.

NO FANNIE MAE

However, the option of doing nothing also remains on the table and Crosby has advised in his interim report against the introduction of U.S.-style government-sponsored enterprises that purchase, guarantee and securitise mortgages.

"Much has been said about the case for launching a U.S.-style agency but it seems unlikely that it would be right to tackle this century's problems with last century's solution particularly given the time it would take to create any such agency," the report said.

The U.S. authorities had to step in this month to prop up Fannie Mae and Freddie Mac after panic erupted among their investors over the mortgage companies' solvency.

Crosby's interim report provides an analysis of the current and future states of the mortgage markets.

He said he expects "the shortage of mortgage finance will presist throughout 2008, 2009 and 2010".

"I suspect that current forecasts for net mortgage lending during this period will prove optimistic, perhaps significantly so," he said.

Mortgage lending has fallen sharply in Britain this year as the credit crunch forces banks to toughen up their lending terms to would-be house buyers, with Bank of England data on Tuesday showing approvals for new home loans at a record low in June.

House prices are also falling swiftly, raising pressure on an already embattled government to move swiftly to restore confidence.

Financial institutions welcomed the BoE's initial mortgage swap plan, but money markets remain tight and lobby groups say more needs to be done. The BoE Special Liquidity Scheme ends in October.