Treasury plan to ease bank lending by underwriting billions in asset-backed debts could kick-start mortgage market

Shares in housebuilders have risen on news that the government is to take forward a scheme to underwrite banks' lending, which is seen as key to re-establishing a functioning mortgage market.

A statement from the Treasury this morning confirmed that the government will roll out a proposal by Sir James Crosby to underwrite billions of pounds of asset-backed debts, as part of a wide-ranging package of measures designed to slow the deepening recession.

The proposal will see the government take the risk on the highest-rated, “AAA” debt, in order to free up banks to start lending on new mortgages. At present banks are restricted from lending because of regulation that means they have to hold a certain amount of assets compared with their liabilities.

Crosby proposed that the government underwrite £100bn of loans, but the Treasury has not given a figure. The statement said only: “The government will work closely with the industry and keep the scope of the scheme under review.”

Housebuilders see the move as vital to get the mortgage market moving again, with net lending being predicted to fall to zero this year. Shares in Barratt rose almost 5% on the news, while Persimmon went 3% higher. Berkeley shares also rose 3%.

A spokesman for the Home Builders Federation said: “We very much welcome this announcement. However, we now need to look at the detail and see how it might be implemented in practice.”

In addition, the government said it will halt the winding-up of nationalised lender Northern Rock's mortgage book. The Treasury said: “The government can confirm that Northern Rock is no longer actively pursuing a policy of rapidly reducing its existing mortgage book.”

The moves were made as part of a package of measures that include allowing the Bank of England to purchase high-quality assets, offering a capital and asset protection scheme for banks, and extending the terms of the credit guarantee scheme.