“Will it work?” are the words on everyone’s lips in response to the £50bn lifeline thrown to UK banks yesterday by the Bank of  England.

The scheme, designed to alleviate the log jam in the money markets, will involve the Bank of England swapping around £60bn of banks’ mortgage liablities for nine month Treasury bills worth around £50bn, rising to £100bn in the coming months.
While we have seen nothing like this since the secondary banking crisis in the 1970s and the support is likely to remain in place for three  years, the scheme is limited in scope.

 It will only apply to mortgages, loans and credit card debt issued before the end of December 2007 as the BoE clearly doesn’t want to encourage new lending.

In addition, all these loans will have to be converted into AAA-rated securities before they can be swapped for Treasury paper.

But will this support scheme do the trick and will hard pressed homeowners feel any benefit any time soon?

I very much doubt it. Even though Abbey today announced that it is shaving 0.1 per cent off its two year tracker and flexible mortgages from 30 April, this is a drop in the ocean compared to the scale of the problems facing mortgage lenders - on both residential and commercial mortgages.

Last week I heard a property lawyer, who works for some of the major high street lenders and property companies, say: ”You ain’t seen nothing yet. Property companies  and residental mortgage lenders are in serious trouble.  It’s not just mortgage arrears, but fraud and tenants defaulting on rents. ”

One high street lender had taken a £880m hit due to mortgage fraud, he said, which if true, is likely to grow.  It is only when repossessed properties are sold at auction that the full scale of over-valued property (due to developers, solicitors and valuers working  in collusion), becomes apparent. 

“It’s all going to get a lot worse. This is just the end of the beginning, not the beginning of the end,” he said.

However, a spokeswoman for Abbey vigourously rejected the suggestion that any one lender had lost £880m due to mortgage fraud, saying that the Association of Police Officers estimated that the figure for the entire industry was around £600m.  Even that figure had been disputed by the British Bankers Association, she said. 

In the meantime, the Council of Mortgage Lenders will be pleading with the Chancellor of the Exchequer, Alistair Darling, today for more help for homeowners in mortgage arrears and facing repossession.

Currently state benefits don’t kick in until nine months’ of arrears have built up and only on the interest element of mortgages of up to £100,000.

After yesterday’s £50bn bail out of the banks and Labour MPs clamouring for the reinstatement of the 10 per cent tax band, the chances of the Government increasing state benefits for distressed homeowners right now are absolutely zero.

So now it’s official. 27,000 homes were repossessed in 2007, the highest figure since 1999, with the sub prime market responsible for half of current repossession orders, despite this sector accounting for only 6 per cent of outstanding mortgages, according to a BBC report.

For those of us who have had their concerns about the goings-on in the sub prime market, this hardly comes as a surprise. But the difference between now and previous house price recessions is that, this time, the chances of sub prime borrowers being able to re-mortgage to a better rate is virtually nil, thanks to the credit crunch.

It is hard enough for prime borrowers to get the sort of mortgage they want, let alone individuals with a poor credit history. While not all repossession orders end in the occupants losing their home, the omens are not good.

A report by the Citizens Advice Bureau claims that sub prime lenders are less willing than mainstream mortgage lenders to negotiate with borrowers in arrears. The report also says that the level of repossession actions in the county courts is now running at a rate last seen in the housing downturn of the early 1990s.

Furthermore, with inflationary pressures building in the economy, there’s no certainty that the Bank of England will cut rates as quickly as the market expects and even when there are reductions, mortgage lenders aren’t always quick to pass them on in full to their borrowers.

So stand by for more depressing reading in the months to come, as the outlook for the housing market turns distinctly gloomy. The latest RICS survey shows that 56 per cent of respondents reported house price falls, compared to just 2 per cent reporting house prices rises, as well as a a decline in the number of enquiries from new buyers.

With first time buyers priced out of the market and buy-to-let purchasers having to pay more for lower loan-to-value mortgages than previously, one has to ask who is going to pick up the slack?