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Britain's mortgage market will come to a standstill next year, with more homeowners paying off their loans than taking out new ones, according to the City regulator and the mortgage industry body yesterday.
Sir James Crosby, who is advising the government on home loans, raised the prospect last week that there would be negative net lending next year, and his warning was echoed yesterday by the Financial Services Authority, the City watchdog, and the Council of Mortgage Lenders.
Michael Coogan, director general of the CML, the industry body, warned of "mortgage rationing" as he admitted the government's demand for home loans to return to last year's levels could not be achieved.
He called on ministers 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 which is paying out to depositors in Bradford & Bingley, the collapsed Icelandic banks and London Scottish Bank.
The contributions demanded by the government could be between 20% and 30% of the industry's profits next year. He also urged the government to renegotiate the EU's state aid terms agreed for Northern Rock, which would allow it to return as a major player to the market. Net mortgage lending has more than halved in 2008 from last year's record £108bn.
The government has told banks accepting its £37bn bail-out that they must lend at last year's levels, but Coogan said: "In fact, unless government takes further targeted action to help market participants, we will see a worsening of the picture next year compared with this. I would therefore not disagree with Sir James Crosby's analysis or prognosis in his report."
He added: "A good outcome next year in my view would be if we 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 FSA and also speaking at the CML's annual meeting, agreed with the predictions for negative net lending, but urged growth in "lending that properly reflects the price of risk".
Net lending reached a low of £15bn in 1995 and has never been negative for an entire year.
Coogan laid out measures the government, Bank of England and the FSA need to take to try and kick-start lending:
• Allow specialist lenders access to the Bank of England's liquidity scheme, which banks can use to swap mortgage bonds for higher-rated government paper
• Reduce the interest rate charged on loans extended to the compensation scheme that must repaid by the banks and building societies
• Renegotiate with the EU the terms of the business plans for nationalised banks
• Stop demanding lenders pass on base rate cuts because of the impact this has on savings rates
• Review the terms of the £37bn banking recapitalisation plan
• Allow mortgage interest payments to be eligible for income support when only one borrower's income is reduced in a household
• Avoid repossessions going through the courts by allowing customers and lenders to agree to a sale and leaseback on a property before considering court action.
Liberal Democrat Treasury spokesman Vince Cable criticised government measures on repossessions as "pitifully inadequate".
He said the proposals - which include a "mortgage rescue scheme" designed to help up to 6,000 homeowners, and more generous state help for people struggling to pay home loans - would only cover "a tiny fraction" of those likely to have their properties repossessed.
The CML has predicted 170,000 households will be more than three months in arrears by the end of this month.
Cable said there would be "200,000 to 250,000 coming down the line in the next year or so".
He added that repossession "threatens to be another major disaster which is just beginning to come over the horizon".
On the government's liquidity and recapitalisation scheme for the banks, he said ministers had been right to actively intervene, but added: "Having done that, the government seems utterly confused about where to go next and how to use the stake it has acquired in the banking system."
Cable said banks were "being pulled in all kinds of directions" with ministers calling for additional lending to support business while at the same time requiring cutbacks in lending in the interests of greater caution.
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