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The mortgage market will come to a standstill next year unless the government takes further action to help banks and building societies, the Council of Mortgage Lenders (CML) said today.
Director general, Michael Coogan, raised the prospect of "mortgage rationing" as he admitted the government's demand for mortgage lending to return to 2007 levels could not be achieved.
His warning echoed last week's prediction by the government's mortgage tsar, Sir James Crosby, that 2009 could see negative net lending for the first time as more home loans are paid off than new ones are granted.
Addressing this year's CML conference, Coogan called on the government to take further steps to make life easier for mortgage lenders, including cutting the cost to the banking industry of funding the Financial Services Compensation Scheme (FSCS).
The scheme is currently paying out depositors in Bradford & Bingley, the collapsed Icelandic banks and London Scottish Bank, and Coogan said the contributions demanded by the government could amount to 20%-30% of the industry profits next year.
"Unless government takes further targeted action to help market participants, we will see a worsening of the picture next year compared to this. I would therefore not disagree today with Sir James Crosby's analysis or prognosis in his report," Coogan told delegates.
"A good outcome next year in my view would be if had lending at levels seen in 2008, but bearing in mind we will be in a recession ... this would be a real challenge."
Jon Pain, the retail markets managing director at the Financial Services Authority (FSA), agreed with the predictions for negative net lending.
But while some areas of the mortgage market had dried up, Pain said the regulator wanted to "encourage growth in mortgage lending that properly reflects the price of risk".
The CML has forecast that net lending this year will be half the record £108bn reached last year. However, the government has set this figure as a target for the banks accepting its £37bn bail-out.
Coogan set out a number of steps the government, the Bank of England and the FSA should take rejuvinate lending. These included calling a halt to demanding that lenders pass on base rate cuts because of the impact this has on savings rates, and allowing income support for mortgage interest payments to be paid when one borrower's income is reduced, not just an entire household's.
He also said specialist lenders should be allowed to use the special liquidity scheme which banks and building societies can use to swap mortgage bonds for higher rated government paper, and that the terms of the £37bn recapitalisation measures should be reviewed.
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