The Council of Mortgage Lenders says the Mortgage Market Review proposals are a "tangible and significant risk" to the UK mortgage market, with a smaller, more risk averse industry likely.
The MMR is in direct conflict with the Government's claim to promote the "age of aspiration" in homeownership and will bring a smaller market with many barriers to entry, the CML says.
Figures are already showing the first significant decline in owner-occupation for many decades, it reports, with a fall of 70.9% to 68.3% of the UK population owning their own homes.
"It is difficult to see how this trend could be reversed - and how we can help deliver an age of aspiration - if regulatory reform reinforces a lack of competition in the mortgage market, with a shortage of funding exaggerating regulatory impacts," it says.
The FSA admits its proposals are a move away from a "dynamic and competitive" mortgage market, with which "most of society seemed happy."
Instead, the FSA will create a market with fewer participants, less competition and less choice at a higher price for consumers, as well as being intensively regulated at higher cost, speculates the trade body.
It predicts UK lending in 2010 is likely to undershoot the CML's £150bn forecast by some margin and says the FSA's proposed actions will shrink the market still further.
It accepts the clear case for regulatory reform, in particular the proposals for enhanced macro prudential regulation, but adds: "The impact of conduct rules on top of prudential changes is likely to worsen the unintended consequences of intervention on the market structure."
"Put simply, if prospective borrowers will not be able to become homeowners in the future, where will they live?" asks the CML.
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