The FSA called the assumptions premature and added: “Frankly, a number of assumptions about the final MMR policy requirements have been made in making that assessment.”

Speaking to the Building Societies Association annual mortgage seminar, Lynda Blackwell, mortgage policy manager at the FSA, never named the CML but said the biggest problem was the assumption that if a mortgage is affected by any of our changes it is not granted at all.

The proposals would only affect the loan-to-value of the mortgage offered or push up the repayment, not lead to a mortgage refusal, said Blackwell.

The regulator also drew the distinction between purchase and remortgage applications, saying the implications for home buyers and remortgagors are vastly different.

The FSA said: “If a home buyer were able to borrow £10,000 less, this may have impacted upon their choice of property or even their decision to buy, whereas if the same applied to a remortgagor, they still have a home but just would not have been able to withdraw as much equity – which doesn’t impact on the housing market save to the extent that they are using it for a buy-to-let deposit, for example.”

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The regulator went on to deny the assertion the MMR would create mortgage prisoners, with people stranded on mortgage products unable to satisfy lender criteria to remortgage away.

“People are of course already trapped because of market contraction – although happily the majority are currently better off on the lender’s SVR. We estimate that market contraction has already impacted on over 2 million borrowers – borrowers who are impacted now, before we have made any changes,” said Blackwell.

The regulator said the assumption that the 3.8 imperilled mortgage borrowers are happily paying their mortgages is also wrong.

“Our analysis suggests that 46% of borrowers are under financial pressure because of the level of their financial commitments and expenditure in relation to their income.”

Low interest rates continue to act as a buffer for these borrowers making them more comfortable than they would be if rates rose, said Blackwell.

A fall in short-term arrears from 1.2% of loans in 2009 Q1, to 0.88% of loans in 2010 Q2 masks the fact a significant number of these borrowers are not clearing their prior arrears, she added.

Lender unwilling ness to repossess is helping to mask the true extent of the problems, during a period when £184m was written off by lenders, she added.

“Even a modest increase in interest rates could lead to a significant increase in arrears.”