Plans for taxpayer to take on mortgage risks in radical changes to housing market

The taxpayer could become responsible for billions of pounds of mortgages under radical proposals to restart the housing market.

The Government would offer to take the risk of newly-issued mortgages on to the books of the Bank of England and exchange them for short-term Government bonds.

The scheme, which is being considered by ministers, would provide the banks and building societies with the resources and confidence they need to increase lending.

If it adopts the idea, the Government is certain to be accused of 'rewarding failure' by once again bailing out the banking system from a mess of its own creation.

The plan is one of a number of ideas contained in an interim report by the former chief executive of the Halifax, Sir James Crosby, who has been asked to examine ideas to ease the credit crunch.

The lack of funds in the wholesale financial markets, where banks lend to each other, has led to a rationing of mortgage lending, sent house prices plunging and led to a crisis for house builders.

Sir James found that as much as 30 per cent to 40 per cent of home loans in Britain have historically been funded by raising money in the financial markets, not from depositors.

But since financial markets froze over when the credit crunch struck almost a year ago, only two or three fresh bundles of new home loans (known as mortgage-backed securities) have been successfully sold in financial markets.

The Bank of England helped ease the immediate financial strains on High Street lenders in the spring when it launched its Special Liquidity Scheme.

Under this plan the Bank agreed to take at least £50billion of mortgage securities issued before December 2006 off the lenders' hands.

It offered to swop these for newly-minted Government bonds to help nurse the balance sheets of the banks and building societies back to health. It is also already supporting the failed mortgage bank Northern Rock to the tune of up to £55billion.

Sir James has been told by lenders that the present scheme does not go far enough.

He is considering submissions by the Council of Mortgage Lenders and others which recommend that the Government expand the existing scheme to include new mortgages.

The Government believes that it has some breathing space because with house prices now tumbling at the fastest pace in a decade, demand for home loans has subsided temporarily.

But it sees merits in putting in place a new facility which would make it easier for new borrowers to access funds and would further ease the pressure on banks' balance sheets.

Effectively, if the Government were to adopt such a plan it would mean transferring some risk from the banks to the taxpayers.

Newly-issued mortgages are regarded by lenders as the most risky and the ones most likely to go into default.

Sir James expects to complete his report and recommendations in time for the Pre-Budget Report scheduled for October.