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NLGN has been campaigning for local authorities to be able to offer financial support to those affected by the credit crunch. It hopes this would stave off repossessions and evictions, prop up the housing market to prevent remortgage difficulties and support first-time buyers to buy locally.

Currently, the NLGN is gathering signatures to a letter from council leaders calling for the government to support local authority mortgages. (See letter attached.)

So far, signatures have been collected from Hackney Borough Council in London, which is already conducting a feasibility study on its participation, as well as Lambeth Council and Portsmouth City Council. Manchester City Council has also thrown its support behind the proposals, with Liverpool expected to follow suit.

Speaking to FTAdviser.com, NLGN spokesman James Hulme said councils could also act as guarantors for those in difficulty or could buy up homes where homeowners are struggling.

"The government has recognised that its time for other providers to step in and we think this will be of interest to many councils," he said.

The NLGN is calling for the government to allocate around £2bn to local councils, a figure which it believes will help 15,000 people out of difficulty across the UK.

The NLGN said that government has already pumped billions of pounds into the banking system in a bid to prevent the sector from wide-scale damage, and £2bn is very little in comparison.

Aside from gathering signatures of support, NLGN is also working on an action plan to persuade the government to allow councils to grant mortgages and will lobby the government when parliament resumes normal sessions at the beginning of September.

London Councils, the umbrella group representing all of the capital’s boroughs, is also backing the move and held a summit last week to gauge support.

Spokesman Chris Hogwood said the summit, which brought together mortgage lenders and councils, demonstrated there was lots of scope for councils to get involved in loaning mortgages.

"The council has a role in supporting families at risk of repossession and in Autumn we will be ready to launch proposals to the government to relax the regulation and give more freedom to councils to offer mortgages, right now housing finance is strictly controlled," Hogwood said.

Under the scheme, councils would be able to borrow money under prudential borrowing rules and offer support to a select group of people, such as first-time buyers or people involved in mortgage difficulties, particularly when numbers of mortgage defaults might impact disproportionately on social housing demand in the area.

However, Hogwood added: "In order for councils to offer mortgages there needs to be more freedom on prudential borrowing."

Local authorities have a history of providing mortgages and since the introduction of the 1959 House Purchase and Housing Bill have routinely lent to local residents up until the early-1980s when competition increased in the mortgage market.

With repossession levels at their highest since the early 1990s, both the NLGN and London Councils argue that local authorities are in an ideal position to help stabilise the housing market.

The Council of Mortgage Lenders (CML), however, warned that local councils would have to ensure they fulfilled the regulatory lending requirements.

"While it may help first-time buyers and homeowners having difficulty remortgaging, if this means providing higher risk loans then local authorities will need to consider the full implications of this," a CML spokeswoman said.

Norwich & Peterborough Building Society however supported the idea and said it could actually be good for the mortgage industry.

"With such contraction in the market there is room for other bodies to come in and lend.

"We are getting more applications than we can process so this is not a bad thing for those lenders who are still lending," said Alison Rolls, head of communications at Norwich & Peterborough.

Although it is not yet clear whether the government will allow councils to offer mortgages, NLGN believes that if the government does back the initiative it would not be long before the proposals could be put into action.

"It would take no time at all to do it," said Hulme, adding: "It just needs to be agreed with the Treasury as well as how much money they can allocate to it."

By the end of this year, the CML predicts that repossessions will rise to 45,000 with mortgage arrears expected to rise to 170,000.