THE Obama Administration will spend $US75 billion ($117 billion) on an effort to stem the tide of foreclosures affecting 6 million American households.
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Ten per cent of US mortgages are overdue or in a phase of foreclosure.
The details of the much-anticipated rescue package came as the US Federal Reserve warned the US recession would be deeper and longer than it thought only three months ago.
Releasing the minutes of last week's Federal Open Markets Committee meeting, the Fed said it expected the US economy to contract by between 0.5 per cent and 1.3 per cent for this year. The forecast in November was for the economy to shrink by only 0.2 per cent at worst.
The Fed is revising its jobless rate to between 8.5 per cent and 8.8 per cent this year. The old forecast of 7.6 per cent has been exceeded by the worst rate of unemployment in 16 years.
But the bleakest aspect of the new assessment was the predication that the "recovery would be unusually gradual and prolonged". Unemployment is expected to remain "substantially" higher until at least 2011.
The President, Barack Obama, travelled to Mesa, Arizona, one of the nation's hot spots for foreclosures, to unveil his long-awaited plan to stem foreclosures. In Phoenix house prices have plunged 43 per cent since 2005.
"In the end, all of us are paying a price for this home-mortgage crisis," he said. "And all of us will pay an even steeper price if we allow this crisis to continue to deepen - a crisis which is unravelling home ownership …
"But if we act boldly and swiftly to arrest this downward spiral, then every American will benefit."
The plan has three elements:
- Home owners whose home values have fallen so much they cannot refinance with a lower rate will get assistance to do so. This could help up to 5 million home owners reduce their monthly payments.
- $US75 billion will be spent on a combination of incentives to lenders to participate in restructuring loans that have recently gone into default or foreclosure. This is expected to reach between 3 million and 4 million Americans.
- About $US10 billion from the Troubled Assets Relief Program will be made available to the US mortgage giants Fannie Mae and Freddie Mac.
Mr Obama said he would also support changes to bankruptcy laws to allow judges to restructure home loans as they could restructure other loans but he acknowledged this was a matter for Congress. It is likely to be fiercely resisted by Republicans.
The former Federal Reserve chairman Alan Greenspan, once the champion of free markets, has told the Financial Times, that nationalising the US banks may be the best option.
"It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring," he said. "I understand that once in a hundred years this is what you do."
Dr Greenspan's comments capped a day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.
"We should be focusing on what works," Lindsey Graham, a Republican senator from South Carolina, told the Financial Times. "We cannot keep pouring good money after bad.
"If nationalisation is what works, then we should do it."
