Massive mortgage squeeze

Net new mortgage lending is likely to fall to less than zero next year, according to a report commissioned by the Treasury from Sir James Crosby, the former chief executive of HBOS, owner of the Halifax.

Sir James is warning that as homeowners are paying off mortgages, banks are putting less money back into the housing market than they are taking out.

This represents a wholly unprecedented collapse in funding for the British housing market and Sir James says it's likely to lead to further declines in house prices, falls in consumer spending and a rise in unemployment.

It comes after net new mortgage lending has already fallen from £108bn in 2007 to a forecast £40bn this year.

Net new mortgage lending has never been negative, since records began.

Sir James is particularly worried about the impact of the collapse in housing finance on Britain's battered housebuilders. He says that they are dependent on mortgages worth 85% of the value of homes being sold, and that the provision of these has tumbled.

Part of the cause of this drying up of finance is that banks are having to redeem £160bn of bonds backed by mortgages over the coming three years, when it expects to receive just £150bn in deposits from ordinary savers.

That's why Sir James is recommending that the Treasury auction £100bn of insurance to wholesale providers of funds, which banks would then lend in the form of mortgages.

The chancellor said yesterday that he'll provide the support, if he's allowed to do so by the European Commission.