Britain's mortgage lenders have called on the Bank of England to launch a new initiative to kick start the mortgage market.

The Council of Mortgage Lenders said that the Bank of England's Special Liquidity Scheme, set up earlier this year to ease the funding constraints of lenders, has not been effective in attracting investors back to the credit markets. Investors fled from the market in the wake of the US sub-prime crisis.

Many mortgage lenders rely on the credit markets to sell on packages of their mortgages, either in the form of covered bonds or mortgage backed securities. In this way they raise funding to offer more mortgages to new borrowers.

The lack of appetite for mortgages within the credit market means that lenders are being more circumspect with their lending. Rates have spiralled, and new buyers are finding it very difficult to secure a mortgage deal.

This in turn is dragging down house prices, as sellers are forced to axe their prices in a bid to secure a sale from a dwindling number of buyers. The number of home sales fell to its lowest level in 30 years in June, according to figures published today by the Royal Institution of Chartered Surveyors.

Under the plans outlined by the CML, the Bank would act as a backstop to the credit markets by agreeing to accept new issues of securities or bonds as collateral. However, the CML proposes that the Bank would only agree to do this if the securities had first been sold to another financial institution.

This arrangement would mean that buyers could be found for the new issues of securities since they would then have the guarantee that they could potentially pass on the securities to the Bank of England in return for more liquid funds, should they encounter difficulties.

This process is designed to create a more liquid market in mortgage-backed securities, which lenders are presently finding difficult to sell. The Bank's principal role under this proposal is to offer re-assurance that the market for these bonds and securities will remain liquid and that they can be traded.

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