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There is a possibility that new mortgage lending in 2009 may fall to less than zero, according to a report commissioned by the former chief executive of HBOS, Sir James Crosby.

The warning from Sir James is  that as homeowners are pay off their  mortgages, banks will not be putting as much mortgage funds back into the market.

This represents a collapse in mortgage finance for the British housing market and Sir James says it’s probably going  to lead to further drops in house prices and lead to a rise in unemployment.

This year  new mortgage lending has already fallen from £108bn to a forecast £40bn in 2008.

Net new mortgage lending has never been negative, since records began.

Sir James is particularly worried about  the collapse in available mortgage finance on Britain’s housebuilders. He says that they are dependent on mortgages worth 85% LTV, and that the amount of these mortgages has tumbled.

Part of the lack of funds is that banks are having to pay back £160bn of bonds backed by mortgages over the coming three years, when it expects to receive just £150bn in deposits from ordinary savers.

Sir James is recommending that the Treasury auction £100bn of insurance to wholesale providers of funds, which banks would then lend in the form of mortgages.

Alistair Darling said yesterday that he’ll provide the support, if he’s allowed to do so by the European Commission.