As part of a report commissioned by the Treasury, the government may have to give a taxpayer guarantee to billions of pounds of mortgage market bonds, in an effort to revive the UK mortgage market.

However, such a move would be controversial and could be seen as the partial nationalisation of mortgage finance. The report expects the shortage of mortgage finance to persist till the latter part of 2010.

City watchdog, the Financial Services Authority’s deputy chairman Sir James Crosby will publish the assessment of the outlook for mortgage finance later. Sir James’s assessment of the health of the British mortgage market is likely to be a gloomy one.

A former banker, Sir James blames a collapse in demand for mortgage-backed securities, or investments created out of mortgages and sold to banks and large investors.

Sir James fears that a long-term mortgage drought would turn the current downturn in house prices and consumer spending into something considerably worse. He believes that it may be necessary for the government to guarantee new better quality mortgage backed securities, to re-stimulate demand for these securities.

Later this morning, Sir James is expected to say that it may be necessary in view of the government’s objectives of supporting financial stability and operating in the long-run interest of consumers and the economy.

However, this could be seen as the taxpayer underwriting the mortgage market, the partial nationalisation of mortgage finance and it would be extremely controversial.