Ben Bernanke, the Chairman of the US Federal Reserve, gave warning yesterday that the total loss from defaults on American sub-prime mortgages could eventually reach $100 billion (£49 billion) and indicated that banks needed to devalue further the bonds backed by these high-risk home loans.

Mr Bernanke announced that he was drafting rules that could make it compulsory for borrowers to prove their income, as he attempts to put a floor under America’s housing market slump, which is rapidly spreading beyond the mortgage industry and contaminating financial markets.

He is also working on a new rule that would limit lenders’ scope to penalise early mortgage repayments, as part of a campaign to reduce the potential for defaults that result from fraudulent or unreasonable lending practices.

Mr Bernanke said that losses relating to mortgages, which include bonds backed by home-loan repayments, could reach $100 billion, before hinting that the eventual losses may be higher still.

“A lot of the sub-prime mortgage paper is not, you know, as good as was thought originally,” Mr Bernanke said yesterday, on the second day of his twice-yearly report to Congress on the US economy.

“The credit-rating agencies have begun to make sure they account for those losses and they have downgraded some of these products.”

Mr Bernanke said that he was working with some banks to help them to assess the value of mortgage assets such as collateralised debt obligations, or pools of bonds backed by sub-prime home loans.

Mr Bernanke has been criticised in Congress for not doing enough to prevent the meltdown in America’s sub-prime mortgage market, which was prompted by increasingly lax lending practices that led to a surge in defaults.

However, Mr Bernanke defended himself, saying that the Federal Reserve was undertaking a “top-to-bottom” review of lending practices.

“We are moving as fast as we possibly can,” he said.

At about the time that Mr Bernanke was speaking, Standard & Poor’s said that it had cut its rating on a further 418 mortgage-backed securities, worth about $3.8 billion, in some cases by as many as eight notches.

The bonds, some of which saw their rating cut from AAA to BBB, were backed by so-called second-lien, or piggyback, mortgages.

These are taken out alongside the main home loan and charge a higher interest rate because the primary mortgage lender has first claim on the house.

S&P added that it expects that second-lien loan losses “will significantly exceed historical precedent” and will be much higher than its previous forecasts.

Sub-prime jitters continued to fuel speculation that more hedge funds were running into difficulties.

One London-based fund-of-hedge-funds manager said that if well-regarded hedge fund managers such as Bear Stearns and Dillon Read Capital Management could get into trouble, there were bound to be others.

He added: “There is extreme angst among the prime brokers [investment banks providing finance and dealing services to hedge funds].”

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