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In a sign that the U.S. housing crisis is getting worse, not better, the Bush administration and the mortgage industry are moving to stop a fresh wave of Americans from losing their homes to foreclosure.

The government Tuesday directed Fannie Mae and Freddie Mac to ease terms on hundreds of thousands of delinquent home loans. The announcement follows similar foreclosure prevention plans by major commercial banks, including Bank of America Corp., Citigroup Inc., and JPMorgan & Chase Co. The bank said that Citigroup's efforts, for example, would save as many as 130,000 homeowners from foreclosure.

“We need to stop the downward spiral,” said James Lockhart, director of the U.S. Federal Housing Finance Agency.

This week's actions mark a renewed effort by the government and banks to tackle the heart of the mortgage crisis – the millions of American households losing their homes or threatened with foreclosure as the United States slides into recession. The various loan workout plans would touch roughly 1.6 million homeowners.

The move by Fannie Mae and Freddie Mac, which own or guarantee nearly 60 per cent of all U.S. home mortgages, should set a standard for the rest of the industry, Mr. Lockhart said.

Anything that keeps homeowners out of foreclosure is a good thing, agreed Celia Chen of Moody's Economy.com. But she said these programs “only nibble at the problem.”

Some U.S. authorities also criticized the plan as inadequate. Federal Deposit Insurance Corp. head Sheila Bair said the plan “falls short of what is needed to achieve wide-scale modifications of distressed mortgages, particularly those held in private securitization trusts.”

Those mortgages could prove much trickier to modify.

As many as 12 million homeowners are now “underwater” on their mortgages, meaning they owe more than their homes are worth, she said.

By the end of June, more than four million homeowners were behind on payments or in foreclosure, data from the Mortgage Bankers Association show. That represents 9 per cent of borrowers with a mortgage.

And Moody's Economy.com estimates that 8.5 million U.S. homeowners will default on their mortgages between 2008 and 2010. Roughly 5.2 million of them will lose their homes.

Troy Courtney, for example, left his Mill Valley, Calif., home after many attempts at a loan modification. Mr. Courtney had two loans on the house and could not persuade the loan manager to modify terms.

“I feel like I missed the boat,” said the San Francisco police officer, 44.

Economist Nouriel Roubini of New York University said the underlying problem is that Americans have too much debt.

“You cannot grow yourself out of a debt problem,” he said. “When debt to disposable income is too high, increasing the denominator with rebates is ineffective and only temporary. You need to reduce the debt.”

The Fannie Mae and Freddie Mac plan targets homeowners most at risk – those who've missed at least three loan payments, live in their homes and haven't declared bankruptcy. Under the arrangement, Fannie Mae and Freddie Mac will pay loan service companies $800 for every homeowner for which they arrange more affordable monthly payments (defined as 38 per cent of gross household income), either by cutting interest rates, extending loan terms or deferring payment of principal.

The program is set to begin Dec. 15.

Citigroup said it would target borrowers at risk of foreclosure by cutting interest rates to as low as 3 per cent and stretching payment periods to as long as 40 years.

“With the unemployment rate rising and rising, more and more borrowers are getting into financial distress because of loss of income,” said Sanjiv Das, chief executive of CitiMortgage. “It is a problem the country will face for some time to come, so it is very important to reach out to borrowers before they become delinquent.”

Even U.S. authorities acknowledge the plan has limitations. The government is not stepping in to forgive all or part of any mortgages.

“There is no silver bullet to address the housing downturn,” said Neel Kashkari, the Treasury's interim assistant secretary for financial stability. “We are experiencing a necessary correction and the sooner we work through it, the sooner housing can again contribute to our economic growth.”

The scope of the problem is much larger than the relatively small part of the problem that is in the hands of Freddie Mac or Fannie Mae.

The dismal shape of the housing market is making loan modifications increasingly tricky. As U.S. home prices continue falling, a growing number of homeowners are underwater on their mortgages.

These homeowners have little incentive to honour their debts, and many of them will choose to simply walk away from their homes.

And U.S. officials said most troubled mortgages are held by entities other than Fannie and Freddie.

Mr. Lockhart urged those lenders to follow Fannie Mae and Freddie Mac's lead. Beyond moral suasion, the government can't make that happen.

Economist Ed Yardeni said Fannie and Freddie remain “hobbled” by inadequate capital and so they are unable to vastly grow their mortgage portfolios. He urged the government to nationalize the two agencies, and let them lend as much as $2-trillion at a heavily discounted rate of 4 per cent.

“That would be a much more effective way to bail out the financial system, the housing market, and the economy,” Mr. Yardeni said.

The Treasury Department seized the two government-created entities in early September because of their ailing finances.

With a report from Associated Press