Is the Bank of England about to step in with a major intervention in the financial markets?  Rumours of a move by the Bank to improve liquidity have been circulating for days and the BBC carried a report last Thursday which suggested that it was a matter of when rather than if.

Much of the recent slow down in the housing market has been caused by the difficulty banks have faced raising funds to lend as mortgages.  Until recently, investors and other banks have been happy to provide funds to mortgage lenders, seeing mortgages as a good investment that generates income (the interest we all pay on our mortgage) backed by a valuable asset - property.

With the advent of the USA sub-prime crisis last year, banks and investors suddenly became a lot more cautious about lending money to mortgage providers.  The result has been that lenders don't have the funds to provide mortgages or have to pay more for those funds than they had to previously.  Even cuts in the official interest rates by the Bank of England have not persuaded banks and investors to cut their charges for providing money to mortgage lenders. 

Now, the Bank of England is rumoured to be considering a new lending programme that would allow mortgage lenders and banks to hand over some of the mortgages they hold to the Bank in return for cash or something very close to it.  In effect, homeowners with mortgages would end up paying the Bank of England rather than our lender (although we won't notice it).  Meanwhile, the banks, with new cash and free of some of the doubts about the quality of their current mortgage loan books, would be able to lend again and borrow from other banks. 

As yet, the details of the scheme are still being worked out, particularly with regard to insuring taxpayers against potential losses.  Liberal Democrats shadow chancellor Vince Cable said: "Since the mortgages from the banks are of inferior quality and higher risk than the government bonds which they are replacing, the implication must be that taxpayers are shouldering the risks and losses of the banks.  We need urgent reassurances from the government that the exchange is taking place on a discounted basis so that the banks, and not taxpayers, carry any losses."

Even if the deal does go ahead, and it looks as if it will, it will have to be on a large scale to have the desired effect.  Simon Tyler, of Chase de Vere Mortgage Management, told the BBC that there was a £50bn-£70bn undersupply of funds, giving observes a benchmark against which to judge the size of any intervention.