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The government may have to give a taxpayer guarantee to billions of pounds worth of mortgage market bonds in order to revive the market.

The recommendation is part of a report which the Treasury instructed that looks at possible ways to revive the UK mortgage market.

But the move could be seen as the partial nationalisation of mortgage finance with the government backing bonds.

The report states that  the shortage of mortgages is  to persist till at least the end of 2010.

The assessment of the mortgage finance is due to be published later this year by Sir James Crosby, the deputy chairman of the Financial Services Authority.

His assessment of the  mortgage market is about as gloomy as it’s possible to be.

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

He fears that a long-term lack of mortgage finance could turn the current downturn in house prices and consumer spending into something much worse.

He also believes it may be necessary for the government to guarantee new and better quality mortgage backed securities, to raise the demand for these securities.

But it could be seen as the taxpayer underwriting the mortgage market, the partial nationalisation of mortgage finance, and it will be very controversial.

The Liberal Democrat Treasury spokesman, Vince Cable, told the BBC that he was uneasy with the idea for two reasons.

“First of all this is a straightforward proposal to let the government take the risks for private lending and companies will continue to make their profits from it,” he said.

“Secondly because it could have an effect of simply reflating this housing bubble that is now bursting in a rather painful way and reflate it in a way that prevents first time buyers ever getting on to the ladder.”