Mortgage lenders are to be told to pass on interest-rate cuts to their customers in return for easier and longer loans from the Bank of England as it tries to restore order to the housing market, The Times has learnt.

In a radical move to pour liquidity into the blocked lending markets, the Bank is preparing to tell banks and building societies that they will be able to use a wider range of assets as security for loans, and no longer have to rely on top-rated mortgage securities.

The move comes amid fears that a third of British estate agents could close their doors within 12 months because of the downturn.

The Bank will also follow the US Federal Reserve in offering more three-month loans to banks rather than concentrating on shorter terms.

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The moves are being proposed as a way of encouraging banks to start lending to each other again. Their failure to do so has been a key factor in the worldwide credit crunch, and in Britain means that the lenders do not have enough money to finance loans.

But at a summit with Alistair Darling next week the mortgage lenders will be told that in return for the Bank helping to free up the market, they will be expected to pass on rate cuts, which many failed to do again last week after the latest Bank reduction.

They will also be told they will be expected to help householders who hit difficulties. They will be reminded of their duties to do all they can to avoid repossessions by reworking mortgages, offering people lower monthly payments while extending the term.

The deal has the full backing of Gordon Brown and Mr Darling. Mr Brown will meet bank chiefs in Downing Street tomorrow and in New York on Wednesday as they discuss ways of combatting global financial turmoil. Mr Brown is urging banks to be more open about potential bad debts.

The intervention of Mr Brown and the Bank’s move underlined the fears about a collapse in the market. The Times has learnt of a huge slump of confidence among estate agents. Of the estimated 12,000 agents, at least 4,000 will close by next year, according to predictions by the biggest network of independent estate agencies.

Robin King, director of Movewithus, who described the closures as “massive”, said that sales made within his network had dropped by between 30 and 50 per cent since last year.

One estate agency, the Property Shop, based in Norfolk, shut nine of its ten offices this month, with the loss of about 30 jobs, just before its parent company, the Alexander Partnership went into administration.

Writing in the News of the World, the Prime Minister said yesterday that Mr Darling would discuss “measures to ensure those lower interest rates are passed on to mortgage holders”.

He called on the biggest financial institutions to ensure potential problems were not kept secret.

“Although the Bank of England has cut rates in recent months, the banks have not always been passing those reductions to their customers,” he wrote.

He went on: “If the world’s largest banks could come together quickly and agree as a group to come clean about the potential bad debts they face, we could reduce the uncertainty and risk they face and restore confidence back into the markets.”

Mr Darling said yesterday that the present turbulence was “the biggest economic shock since the Great Depression”.

Calling for reform of bodies such as the International Monetary Fund and World Bank, he said they risked becoming “marginalised and ineffective” unless they adapted to modern issues.

Recent figures from the National Association of Estate Agents showed that the number of housebuyers on agents’ books dropped to the lowest yet recorded in February, from an average of 276 per agent in January to 243. The number of properties for sale fell from 83 to 74 between January and February this year. At the same time, Justitia, a credit management agency, said that the number of cases it handled from borrowers struggling with debt had increased by 30 per cent in the last six months.

Experts said the forecast was a clear sign of attrition as a result of the credit crunch. Mr King said: “People may not like estate agents, but if they are doing well, everyone else is too. If no one is buying and selling, it is a sign that no one is making any money.”

Angela Knight, chief executive of the British Bankers’ Association said: “The question of liquidity is one thing that the banks have wanted to see addressed for some time, issues such as broader collateral and greater liquidity for the sorts of longer terms similar to how the Federal Reserve operates. The UK, US and Eurozone are closely linked so it’s important that we have the same conditions.”

The Bank of England currently accepts so called “triple A” mortgage-backed securities as loan collateral. But the European Central Bank and the Federal Reserve take a much wider and lower-rated range of securities. The UK banks insist they do not want to “dump” their poorer assets on to the central bank but add that it is not fair if the European and US can use lower rated assets to get loans.

On Friday Steven Crawshaw, the chairman of the Council of Mortgage Lenders and chief executive of Bradford & Bingley, said that mortgage lending in the UK would be cut in half this year, from £108 billion last year, if the Bank of England doesn’t pump more money into the market.

The rate at which banks lend to each other closed up on Friday at 5.9275 per cent, from 5.9238 on Thursday. That means that despite last week’s base-rate cut and existing promises by the Bank of England to consider a wider range of collateral, banks are again becoming increasingly reluctant to lend to each other.

The big numbers

45,000 Estimated repossessions likely this year – up 50 per cent

20,000 Job losses in the City of London as a result of the credit crunch

£150 Average monthly mortgage rise because of banks increasing interest rates

3 million Estimated number of households that will see their mortgage payments increase this year

1.4 million Borrowers will come to the end of their fixed-rate mortgage this year and face steep payment increases

£7,500 The average deposit now required for first-time buyers to get on to the housing ladder

$1 trillion IMF estimate of the total cost of the credit crunch

$40 billon Credit crunch banking losses so far

Sources: S&P, CEBR, IMF and Times archives

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