Mortgage arrears and repossessions could be at a lower level in this recession than in the 1990s slump, the City watchdog said, as lenders warned against tighter regulation.

The head of the Financial Services Authority (FSA) Lord Adair Turner said some homeowners had benefited from lower interest rates, as he presented a discussion on the future governance of the mortgage market.

But concerns were raised that some parts of society would not be able to borrow to buy a home in the future if access to loans worth a high percentage of a property's value is curtailed.

And the FSA itself came under fire from lenders, who said there was a lack of trust between the FSA and those it regulates.

The FSA, which is reviewing the mortgage market as part of the Turner Review into the future shape of regulation, is considering the possibility of prohibiting certain products, such as 100% mortgages.

Lord Turner said he made "absolutely no apologies" for not knowing what further regulation, if any, will be included in the report, which is due to be published in September.

He said while falling house prices could shift many people into negative equity and rising unemployment will produce increases in arrears and defaults, "but compared to the early 1990s, we are less likely to see mortgage repayment problems among the vast majority of people who, even under the most extreme forecasts for unemployment, will still be in a job."

Industry representatives spoke out against tighter regulation on borrowing limits.

Jackie Bennett, of the Council of Mortgage Lenders (CML), said: "A product ban is simply too blunt an instrument and would not achieve its objective."

She attacked the regulator over its current practices, saying lenders and the FSA were "some way from mutual trust and understanding".

The mortgage market has been hit hard by the credit crunch, which has deprived lenders of a vital source of funding and left them increasingly reliant on using customers' deposits to fund mortgage lending.

The City minister, Lord Myners, speaking at today's conference in London, said the government had "laid the foundations for a strong and sustainable recovery".

He said that the situation in the lending market was now "far better" than in October and January but added: "It was really dodgy then."

Responding to concerns that State-backed banks were charging "punitive rates" to customers, despite low interest rates, he said increased competition was the most effective way to "ensure that customers are treated fairly".

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