Mortgage market 'to receive boost'

Chancellor Alistair Darling could unveil a £50 billion boost to the mortgage market in this week's Budget, according to a newspaper report.

The Observer says that Mr Darling could offer to underwrite billions in mortgage-backed securities to help lenders fund new loans.

Banks traditionally raise the money they need to lend to consumers by selling on bundles of their mortgages to investors, in a process known as securitisation.

But banks are increasingly reliant on using money from depositors to fund their mortgage lending after securitisation dried up in the wake of the problems in the US sub-prime mortgage sector.

Mortgages are now scarcer and more expensive because of the lower volumes now available, adding to the slump in property prices over the past 18 months.

A review by former HBOS chief Sir James Crosby, who was charged with looking at solutions to the problem last year, recommended £100 billion in government guarantees for mortgage-backed securities in 2009 and 2010 to help kick-start the market.

But as the banking industry struggles to rebuild its crippled finances and homeowners pay off more of their debts, he believes that net new lending will fall below zero this year.

The Government said in January that it was willing to provide full or partial guarantees to eligible high quality assets to support lending, and "promote robust and sustainable markets over the longer-term". The scheme, which is subject to state aid approval from European officials, will be announced this week.

According to the Observer report - which has not been confirmed by the Treasury - Mr Darling will announce the creation of two new types of Government-backed asset as part of the plans. One of these will carry a promise that the Government will buy it back at face value at any time.

Mortgage lending has been given other boosts through nationalised Northern Rock, which announced an extra £14 billion in loans, along with part-nationalised Royal Bank of Scotland and Lloyds Banking Group which have also made lending commitments in return for public support.