Washington stepped up its efforts to combat the housing crisis yesterday as the Bush Administration asked mortgage lenders to waive up to 10 per cent of the unpaid amount on 100,000 home loans and the US central bank worked on proposals to increase its lending capacity.

The US Government is urging about 2,000 mortgage lenders to cut the value of some outstanding home loans, arguing that this would make it easier for the borrowers to repay the loans and so benefit the lenders by reducing the risk of a default.

Its target group is borrowers who have made some late payments in the past year but have solid credit ratings.

Furthermore, the Government is promising to guarantee any loan that a lender agrees to write down through the Federal Housing Administration (FHA), which would continue to make the payments if the borrower defaults.

The FHA is a government agency, but is entirely self-financed, largely through insurance premiums, and so the scheme will not dent public funds.

The expansion of the FHASecure scheme will see it encompass about 500,000 borrowers by the year's end.

Democrats had called for the FHA to be expanded so that it could underwrite a larger number of failing loans, but the proposals do not go that far.

Brian Montgomery, the head of the FHA, said yesterday: “We will permit and encourage lenders to voluntarily write down outstanding principal. Our plan will help hundreds of thousands of desperate families who have no place else to turn.”

The FHA will end up underwriting as much as $25billion (£12.6billion) of mortgages, of which about a quarter will probably end up in default, said Brian Fabbri, chief US economist for BNP Paribas.

Although the scheme marks the first time that the Government has taken on the risk on some mortgages in this credit crunch, it has made similar interventions in the past.

These include during the Great Depression of the 1930s and the savings and loan crisis of the late 1980s and early 1990s.

Mr Fabbri said: “The amount is pretty small potatoes when you think that the US mortgage market is worth about $10,000 billion and sub-prime is about 15 per cent of that. The House of Representatives will be pushing for something more substantial.”

The US has 46 million outstanding home loans, of which nearly 6 per cent were behind on payments in the fourth quarter of last year.

Dana Perino, a White House spokeswoman, said: “This is not a silver bullet that will solve all the problems in housing, but it will help some additional people stay in their homes, and that's something the President wants to see.”

It also emerged yesterday that the Federal Reserve is looking at ways to expand its lending power if it needs to inject more funds into the financial system.

Under one option being considered, the US Treasury would borrow more money than it needs and deposit the extra with the Fed. Another option, which economists said was highly unlikely to occur, would see the Fed raise debt in its own name for the first time.

The Fed's plan to boost its funds comes, in part, because it has recently opened to investment banks its “discount window” of cheap loans, previously limited to commercial banks.

The latest initiatives come after the Fed has cut its base rate by 3 percentage points since last August and reduced the rate charge at its discount window. Meanwhile, the Treasury is giving out about $150 billion in tax rebates to help stimulate the economy.

The Treasury has also won agreement from leading mortgage lenders to freeze interest rates on some variable-rate sub-prime mortgages that had been due to be reset higher this year.