LONDON (Reuters) - Britain's financial watchdog plans to propose a ban on self-certified mortgages, nicknamed "liar loans" because of the ease which they could be obtained in the housing bubble of the early 2000s, an industry source said.

The proposal will be included in a long-awaited review of the UK mortgage market, due to be published early next week.

Self-cert mortgages were designed for the self-employed and others who cannot easily prove their income, but have been blamed for inflating the housing market and helping cause banks' bad debt problems which were at the heart of the credit crunch.

Many borrowers were able to exaggerate their incomes and were thus vulnerable to repayment problems and defaulting on their loans.

The Financial Services Authority (FSA) declined to comment yesterday ahead of the publication of its review, but Jon Pain, head of retail markets for the regulator, said in May that allowing self-cert mortgages for employed customers may have been a mistake.

He said at the time that regulators would consider requiring income verification for all mortgages before an offer is made.

Darren Cook, of financial website Moneyfacts, said: "There would have been a place for self-certification mortgages in the market, but only if the product was prudently assessed for realistic declarations and sold to people whom it was originally designed to assist.

"It is likely that a ban on self-certification mortgages will also signal the end of fast-track mortgages," Cook said.

The latter, often classified with self-cert, do not initially require proof of income, but lenders reserve the right to see evidence at any time. The FSA's eagerly awaited review of the mortgage market is also expected to include tighter rules for mortgages for landlords, or buy-to-let, which soared to account for 26 percent of all new mortgage lending by 2007.

Britain's Council of Mortgage Lenders does not gather specific statistics on self-cert loans, but according to Moneyfacts, at the peak of the market in July 2007 they accounted for 23 percent of Britain's prime residential home loans.

Since then, however, providers have either chosen or been forced by the drought in wholesale funding to pull out of the specialist mortgage market, which includes self-cert, buy-to-let and sub-prime loans generally.

Currently only two self-cert mortgages are on offer, both from Platform, an intermediary mortgage lender of the Co-operative Bank.