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The high street banks are braced for Alistair Darling to shrug off recommendations in the long-awaited Crosby report into the mortgage market which is supposed to be published today, along with the pre-budget report.
The report commissioned by the chancellor from Sir James Crosby, the former chief executive of embattled lender HBOS, has considered whether the government should provide a guarantee for the mortgage-backed bonds that helped the housing market thrive until the credit crunch started to bite last year.
Darling may be reluctant to put more taxpayer money at stake after pouring £500bn into the banking sector through the bail-out scheme, which will require the government to take £37bn share stakes in three lenders.
Lenders hope Darling will seize upon any recommendation by Crosby to transfer the risk from investing in mortgage-backed bonds from investors to the government, to kickstart the demand for such bonds, which have turned sour in the financial meltdown.
In his June interim report, Crosby made it clear his aspiration was not to return to an era of easy money, where loans were granted too easily on houses that have since fallen in value. But he did produce statistics that made it clear there is a dramatic downturn in the amount of financing available which would lead to a shortage of mortgage financing until 2010, and possibly beyond. The report showed how quickly the lenders had come to rely on boosting their lending beyond the means provided by deposits from savers. In 2000, they borrowed £13bn from the wholesale markets and by 2007 this had risen to £257bn - about £201bn of this came through mortgage-backed securities.
A decade ago, the top 10 mortgage providers financed more than 70% of the home loans granted out of savers' deposits. By the end of last year, that figure had fallen to 55% as lenders turned to international finance markets to package mortgages into bonds bought by international investors, largely from the US.
Some lenders hope that if the government backed the mortgage-backed security market, it would encourage investors at big pension funds and international banks to start buying the bonds again.
Crosby's interim report laid out the dilemma facing the government, pointing to the impact on "fiscal, debt management and legal implications, and the extent to which the government might distort incentives and create a moral hazard rather than help investors and issuers price that risk more accurately".
The report also highlighted a number of other options that Crosby had been urged to consider, including creating a mortgage-backed bond market and urging the Financial Services Authority to end the different approaches it takes to dealing with banks and building societies.
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