Henry Paulson, the US Treasury Secretary, sent further jitters through America’s housing market yesterday when he said that mortgage defaults, which this year were so high that they prompted a credit crunch, would be “significantly bigger” in 2008.

Mr Paulson blamed increasingly lax lending practices for the expected rise in defaults next year, as mortgage providers sought out more borrowers with poor credit histories to win new customers.

The jump in defaults on home loans will further depress the value of the mortgage bonds that they back, so that banks holding the bonds in their portfolios will have less cash to make new loans to house buyers, businesses and other consumers. This effectively reduces the demand for houses and pushes down prices further.

“The nature of the problem will be significantly bigger next year because in 2006 [mortgages] had lower underwriting standards, no amortisation and no down payments,” Mr Paulson said in an interview with The Wall Street Journal.

“For some time, I have been saying the markets are reassessing risk. The complexity of some of the products and the degree of global integration of the markets means this will continue to take a while.

“There will be volatility and unpleasant surprises. I continue to be focused primarily on the orderliness of the markets because I think the extent of repricing mitigates the inevitable drag on the economy.”

A total of 446,726 American houses foreclosed in the third quarter, kicking off a process that will likely end in a forced auction or repossession. This is a 100 per cent rise on the same period the year before and represents one in every 196 households.

Mr Paulson also said yesterday that he was pressing the mortgage industry to allow large groups of borrowers who were in danger of defaulting on their loans to qualify for home loans with better terms.

He made his comments as the National Association of Realtors released data that showed that home prices fell in one third of US cities in the third quarter, as stricter lending standards caused a 14 per cent decline in sales nationwide. Prices dropped in 54 of 150 metropolitan areas, with Palm Bay, Florida, experiencing the biggest decline, of 12.4 per cent on the year before. Average house prices fell by 2 per cent nationwide in the period.

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