The seizure in Britain’s mortgage market will persist for at least three more years, Sir James Crosby, the former chief executive of HBOS, said yesterday.

His warning came as statistics showed that the number of new home loan approvals fell last month to the lowest since records began. The Bank of England figures showed that the number of mortgage approvals for those moving or buying a home plummeted to 36,000 in June, from 41,000 in May.

The level was 70 per cent lower than that recorded a year ago and the lowest since comparable data were first published nearly a decade ago. Remortgages also fell and total mortgage lending showed its weakest rise for eight years, the Bank said.

The dire report came as Sir James, the man commissioned by Alistair Darling to come up with ways to kickstart the stagnant mortgage market, conceded that it would take years rather than months for banks and building societies to adjust to the new reality. That, in turn, would lead to a rise in defaults and repossessions, he said.

“In my opinion . . . a shortage of mortgage finance will persist throughout 2008, 2009 and 2010,” Sir James said in his interim report, which he presented to the Chancellor yesterday.

Piling on the gloom, the City grandee said that a string of lenders had already withdrawn from the market and he predicted that many mortgage brokers, “an important source of price competition on behalf of consumers”, would disappear. More worryingly, Sir James’s report revealed that banks will have to find about £40 billion every year for the next three years just to refinance their existing mortgage commitments, even before they start thinking about underwriting new ones.

The lack of activity in the mortgage market has dented building societies’ mortgage books, which shrank by more than £670 million during the month, according to the Building Societies Association (BSA).

There had been hopes that Sir James would propose an immediate set of measures to help to loosen Britain’s crippled housing sector but instead he chose to keep his review largely analytical. However, he admitted that even the few remedies he did propose — extending the Bank of England’s existing special liquidity scheme or a new government guarantee for all mortgage bonds — could create more problems than they would solve.

The special liquidity scheme, which was introduced in April, allowed banks to swap mortgages, issued before 2007, for Treasury bills that could then be used to raise funds in the market. Sir James suggested that this could be extended to include any mortgages underwritten since 2007.

Sir James conceded that interventions that distorted the market and prolonged any recovery process would be even less desirable and said the best option might be to do nothing at all and allow the market to recover in its own time with “simpler, more transparent and standardised structures”.

Michael Coogan, of the Council of Mortgage Lenders, told the BBC’s The World at One that an extension of the liquidity scheme was needed to “keep mortgage costs at reasonable levels and prevent . . . a continuing downward spiral in house prices, fewer transactions and lower lending numbers”.

However, Vince Cable, the Liberal Democrat Treasury spokesman, said that Sir James’s caution was welcome. Mr Cable said: “It is critical that siren voices in the City don’t seduce ministers into using taxpayers’ money to underwrite new bank lending and reinflate unsustainable house prices.”