The American sub-prime mortgage market plunged deeper into crisis during the third quarter as US foreclosure filings rocketed by 71 per cent to hit their highest number on record.

Figures released by RealtyTrac, the California-based data service, today showed 765,558 US properties received a default notice, warning their owners of a pending auction of their home or foreclosure in the three months to September.

As the number of people losing their homes rose, it emerged that the US Government is considering putting together a $40 billion (£24.7 billion) proposal to help prevent foreclosures.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation (FDIC), has suggested that the Government turns mortgages in danger of defaulting into affordable loans to help struggling homeowners.

She told Congress today: "Loan guarantees could be used as an incentive for servicers to modify loans. By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”

Ms Bair added that the FDIC is working “closely and creatively; with the Treasury Department on such a plan."

The proposal for a new fiscal scheme helped push Wall Street shares higher, with the Dow Jones industrial average up 183.83 points by midday in New York after a fall of 5.6 per cent yesterday as companies released a series of disappointing results.

Data on foreclosures during the third quarter revealed a 71 per cent rise on the same three months of last year but just a 3 per cent increase on the previous quarter as laws introduced by states to slow repossessions began to take effect.

The new law also helped reduce foreclosures from August to September, which fell by 265,968 over the past month. In California, rules requiring lenders to make contact with borrowers at least 30 days before filing a Notice of Default (NOD), meant that foreclosures fell by more than half, or 51 per cent, in the region.

Six states accounted for more than 60 per cent of US foreclosure activity in the third quarter.

Nevada, once one of the strongest areas in the property boom, topped the league table on foreclosures, with one in every 81 houses receiving an NOD — more than five times the national average.

Rick Sharga, RealtyTrac’s executive vice president for marketing, cautioned that foreclosures would rise again as the economy goes into recession. The US housing slump is already proving to be the worst since the depression of the 1930s.

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