The seizure in the UK mortgage market is set to continue until 2011, prompting a rise in repossessions, an influential review of the mortgage market said today.

Sir James Crosby, former chief executive of HBOS, who is carrying out the review for the Treasury, said that the "shortage of mortgage finance will persist throughout 2008, 2009 and 2010, and I suspect that current forecasts for new mortgage lending during this period will prove optimistic."

As expected, Sir James ruled out setting up a US-style government-backed mortgage agency like America's Fannie Mae to kick-start the UK market.

However, he hinted that British banks could be allowed to swap new mortgages for government debt.

This would extend an existing scheme that was introduced by the Bank of England in April, which lets banks exchange parcels of mortgages, known as mortgage-backed securities, to sell in the market for government debt.

Currently, the scheme only allows banks to swap mortgages that were on balance sheets at the end of 2007.

Sir James said in his report: "I am looking with some urgency at the full range of options identified by market participants for stimulating the supply."

But he also said that it was "debatable whether this sort of approach would help or prolong the transition to better functioning markets in the long term."

While hinting at some options to reignite the UK mortgage market, Sir James also said that doing nothing may be the best course of action.

"The costs of action needs to be set against those of inaction," the report said.

Sir James' report comes as mortgage lending for new home purchases plunged by 70 per cent in June to a record low, according to figures from the Bank of England.

Lenders have struggled to secure funding in the wake of the sub-prime crisis as investors shy away from mortgage-backed securities, which many banks and building societies rely on to raise finance for new mortgage deals. As they limit the loans they offer, lenders are cutting their risks by demanding hefty deposits, excluding all but the most cash-rich buyers from the market.

The lack of new mortgages has helped drag down house prices by more than 10 per cent since the market peaked in August last year, as buyers cut their asking prices to try and tempt buyers.

Sir James is due to issue his final recommendations in time for the Pre-Budget Report in October.

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