Moody's has warned mortgage lenders will be forced to merge when the Government schemes come to an end.
In its latest report, the ratings agency says there will be a lack of viable resources to fill the £319bn funding gap which is left when the Special Liquidity Scheme and Credit Gurantee Scheme end within the next three years.
It expects this lack of funding will lead to consolidation across the mortgage sector in 2010 and in 2011, with mutuals and smaller lenders to suffer the most.
The ratings agency also says the market for residential mortgage-backed securities may not be able to plug the funding gap left by the closure of these Government schemes despite its recent improvement.
It says this market may not have the capacity needed to absorb the level of financing needed which will have a significant negative impact on the market.
The consequences of a funding gap will be tighter credit conditions for borrowers and lending limits and financial pressures placed on originators which will lead to a slower housing market, making it more difficult for borrowers to sell houses.
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