President Bush announced a freeze yesterday on the interest rate payments of some high-risk sub-prime American mortgages that were due to rise next year, in an attempt to prop up the housing market just as new data showed that US home loan delinquencies have hit a 20-year high.

Banks, regulators and bond investors can now double the length of the initial teaser period on some adjustable-rate mortgages to five years.

The freeze, which is optional, will apply to mortgages signed between January 2005 and July 2007 that are scheduled to be reset at a higher rate between January 2008 and July 2010.

It will be administered by the loan servicers, which collect the mortgage interest payments and distribute them to owners of the debt.

In most cases, it is the owners of sub-prime backed bonds that will finance the interest rate freeze, since most high-risk homeloans have been packaged into securities and sold to investors.

The agreement, which was led by Henry Paulson, the US Treasury Secretary, will not use any government money. It aims to boost the economy by reducing the number of defaults expected on the 1.8 million adjustable-rate mortgages, worth about $360 billion (£177 billion) that are due to be reset at a higher rate next year.

An initial interest rate of about 7 per cent is charged on a typical sub-prime mortgage for the first two or three years of its life. This is higher than mainstream home loans offered to more creditworthy borrowers but considerably below the 9.5 to 11 per cent that the sub-prime mortgage holders are charged when their introductory rate expires.

The interest rate rise represents several hundred dollars a month in additional payments on a typical house and, in many cases, will push borrowers beyond their ability to repay. To be eligible, borrowers must be more than 60 days behind in their payments, have less than 3 per cent equity in their property and be unable to afford the higher interest rates when starter rates expire. The agreement is expected to help between 200,000 and 500,000 borrowers.

The plan was announced within hours of new data from the Mortgage Bankers Association showing that borrowers representing 5.59 per cent of American home loans were at least 30 days late with their payments in the third quarter, the highest level since 1986. One in every five adjustable sub-prime loans had late payments in the quarter, the association said.

In a separate report, Moody’s, the credit ratings agency, yesterday described the housing market as the worst since the Second World War, predicting that house prices would continue to fall over the next two years and would not begin to pick up again until 2010.

US house prices, which are already down by an average of 5 per cent since their peak two years ago, will have fallen by a total of 12 per cent when they hit a trough early in 2009, the report said. They will then remain flat for about a year.

Meanwhile, the Organisation for Economic Cooperation and Development gave warning yesterday that the US housing slump would cast a severe chill across the whole economy next year.

In its semi-annual Economic Outlook, the Paris-based think-tank forecast that US GDP would fall below its long-run average and grow by just 2 per cent, recovering slightly to 2.2 per cent in 2009. It said that the Federal Reserve had lowered interest rates to an appropriate level but should stand ready to raise them as soon as the economy recovered to ease inflationary pressures.

The slowdown would come from a steepening fall in residential construction and rising unemployment. In addition, there were “considerable down-side risks” from a sharp decline in house prices or a deepening of the credit crisis into a full-blown crunch for banks and other lenders.

Across the OECD’s 30 member countries, there was little slack in the economy to prevent cost shocks such as the boom in commodity prices from causing inflation to reemerge.

The Economic Outlook said that it was vital that central banks kept a lid on inflation expectations, saying that “it might be necessary to pay a price in terms of lower activity in the short term” to prevent them drifting upwards.

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