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Sir James Crosby’s preliminary report into the future of Britain’s ailing mortgage market has painted a bleak picture for the future of the industry. And he warns lenders are likely to remain short of cash into 2010.

The deputy chairman of the FSA and former chief executive of HBoS pulled no punches is his interim report published on Tuesday, pulling together the results of an industry-wide consultation conducted since last April.

In a letter to Chancellor of the Exchequer Alistair Darling he set out a raft of concerns and measures put forward by lenders, intermediaries and trade bodies.

Sir James concludes lenders are likely to remain short of cash “throughout 2008, 2009 and 2010”, and suggests banks’ forecasts for lending over this time as “perhaps significantly” optimistic.

He wrote: “Aside from their lack of access to new asset-backed funding and despite the beneficial impact of the Bank of England’s Special Liquidity Scheme, banks are struggling to increase the amount or extend the maturity of their wholesale funding.

“Given that more than half of their existing mortgage-backed borrowings will need to be repaid over the next three years, their capacity to make new mortgage advances therefore looks severely constrained.”

He also warned that brokers feeling the squeeze from lenders moving towards direct sales were likely to face more pressure still, adding: “Faced with much lower volumes and lenders switching back to distributing through their branches, mortgage intermediaries, hitherto an important source of price competition on behalf of consumers, are under intense pressure and many will disappear.”

Sir James claimed consultees had put several suggestions forward for breathing life into the market. He said: “I believe this will best be achieved through the return of significant new issuance of mortgage-backed securities, albeit not necessarily at anything approaching the rate of issuance seen in 2006 and 2007.

“We are also considering whether other types of action by the authorities, including the possibility of the government guaranteeing, on commercial terms, the principal and interest on high-grade tranches of new issues of mortgage-backed securities, may still be necessary, taking into account wider government objectives of supporting financial stability and operating in the long run interest of consumers and the economy as a whole.”

These measures were published in a letter to the Financial Times on Saturday from Michael Coogan, director general of the Council of Mortgage Lenders, backed by 11 other industry players, including Chris Cummings, acting director of the Association of Mortgage Intermediaries.

The report, however, also contains a warning that these measures may not end up in Sir James’ final recommendations to the Treasury this autumn.