White House Steps in to Tackle Mortgage Crisis

The US government began an urgent effort to ease the fiscal woes of up to 1.2 million cash-strapped homeowners today as new figures showing an unprecedented number of repossessions underlined the severity of America's mortgage crisis.

President Bush announced a package imposing a five-year freeze on mortgage rates, which were scheduled to jump to often unfordable levels as short-term "teaser" discounts expire.

Political pressure to tackle the challenge has become intense. In a sign of the scale of the challenge facing the US economy, the Mortgage Bankers Association today said 994,000 households are in the process of foreclosure.

The problem is rapidly worsening - the association said a record 5.59% of all mortgages were in default in the third quarter, up by 0.47 percentage points on the preceding three months.

Flanked by his treasury secretary and housing secretary, the president told reporters in the White House's Roosevelt Room that the government program was "a sensible response to a serious challenge", designed "so we can keep our economy healthy and the American dream alive".

The plan was agreed with the Hope Now Alliance - a coalition of banks, lenders and investors holding mortgage-backed securities. Only owner-occupiers will be eligible, to avoid aiding property speculators.

President Bush said the aid would be carefully targeted: "We should not bail out lenders, real estate speculators or those who made reckless decisions to buy homes they knew they could never afford."

The initiative was a rare intervention for an administration with a generally hands-off philosophy towards the financial markets.

Treasury secretary Henry Paulson stressed that the plan involves no government money and will be introduced alongside a streamlining by mortgage firms of the process of refinancing loans.

It won a measure of cross-party support. Barney Frank, the influential Democratic chairman of the House financial services committee, said: "With regard to the proposal that the administration has put forward, I welcome it."

He cautioned, however, that eligibility should not be too tough, warning that it would be wrong both "morally and politically" to exclude more careful homeowners with higher credit scores.

Presidential candidate John Edwards urged a longer freeze of seven years. Meanwhile, one of America's biggest unions, the SEIU, said families have been "preyed on" by lenders for too many years - and that lawmakers need to end a "culture of cosiness" between regulators and big banks.

With a presidential election looming, several politically pivotal states have suffered particularly badly from the credit crunch. According to the data firm RealtyTrac, there were 224,000 foreclosures in the US last month - of which 30,190 were in Florida and 17,276 were in Ohio, both tightly-fought battlegrounds between Democrats and Republicans.

Economists at Goldman Sachs and Merrill Lynch have warned that the credit crunch risks pushing America into recession next year. Some in the lending industry point out, however, that in spite of the rash of foreclosures, an expansion in subprime mortgages over recent years has led to record home ownership in America.

"I understand the numbers are huge. But if you look at the grand scheme of things, foreclosures will affect 15% to 16% [of subprime mortgages]," Gene Tricozzi, president of the New York Association of Mortgage Brokers, told The Guardian.

"That means 84% are in homes they wouldn't otherwise have been able to afford - they're happy homeowners."