Local Government Association policy officer in social affairs, health and housing, John Austin Locke, said preliminary discussions with council mortgage lenders show they are not in favour of 'fixed equity share ownership homes'.
They are concerned that, in the event of default payments, they would not have 100% ownership of the property.
'We have a very conservative mortgage-lending market. Unlike in America, surprisingly, where banks are much more engaged in their local communities,' he said.
The objective behind the scheme, according to housing minister Nick Raynsford, is to help those tenants who have paid rent for 20 or 30 years and have nothing to show for it.
'Some people benefited from buying their council homes. We think it right to try and extend that opportunity to others,' he said.
The scheme would maintain stocks of social housing and have an impact on social exclusion. An equity stake in council homes for tenants would encourage more community responsibility, a greater sense of belonging and less disaffection with society. 'It's an idea that has got enormous potential,' he added.
But besides the problem with mortgage lenders, there are other complex issues about the scheme which would have to be worked out, admitted Mr Raynsford, such as making it compatible with the right to buy scheme.