There is considerable support among councils to start lending either directly or through partners but no details have yet been made public. Until the 1980s councils were the main providers of mortgages in the UK.
A decision from the government to cut the interest rates charged to local councils from 5.07% to 3.93% means more authorities are expected to be interested.
'The problem with the housing market isn't the lack of properties for sale; it's the lack of mortgages even for people with stable jobs and good incomes,' said Steve Reed, leader of Lambeth Council.
'If councils can help those people borrow the money they need to buy a home, then we can get the housing market moving again, stop the crash in house prices, and help bring the economic recession to a swifter end,' he added.
But those who apply for loans from councils will have to meet tough criteria. 'We certainly won't be lending money to people classed as subprime who have no chance of paying it back. But we believe that if we can use our financial muscle to help financially secure people get the housing market moving again and, that way, ease the country out of recession, then that is a duty we owe to everyone who hopes to keep their job and protect their income through the downturn,' explained Reed.
According to James Hulme, head of communications at think tank New Local Government Network, there is a lot of support for the idea because the market is not providing a solution.
'Whilst we still accept that in normal circumstances these things are best left to the markets, we feel that because of these particular circumstances that the state should step in and give authorities the opportunity to provide mortgages,' he said.
He claimed there was a lesser risk for local authorities in mortgage lending as they knew the local area and they should not head into subprime deals. 'We are absolutely clear that councils should treat every proposal as a commercial bank would,' he added.
His organisation sees a role for councils to provide lending for people who can't find a minimum of 25% deposit, especially first time buyers.
He added local authority mortgages should be aimed at people who two years ago would have easily got a mortgage and now are being rejected by the banks.
