‘21% of home owners could face negative equity’

But the impact of negative equity would not be limited to this group alone.


"Mortgage arrears and repossessions are already significant and worryingly their numbers increased while economic conditions were still benign," the report said.

"To date, mortgage arrears and repossessions have been rising among less creditworthy and buy-to-let borrowers. The problem is likely to become more widespread as the impact of the recession is felt by households via higher unemployment and lower incomes."

The FSA also warned the UK recession may be even worse than expected and cites lack of credit as the main problem stopping recovery.

"The ability of banks to perform their essential function of lending to the real economy is still impaired and deleveraging of banks, other financial institutions and households is exerting deflationary pressure on the real economy, making the scale and length of the economic downturn very difficult to predict."

And it warned: "Macroeconomic and financial system risks have become more closely interconnected than in previous years. The future health of the financial system will be critically influenced by the pattern of economic growth or contraction, and therefore the severity of credit losses arising in the real economy. But, to a far greater extent than in any other recent economic downturns, real economic developments are in turn likely to be affected by the ability of the banking system to maintain lending."

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