Hundreds of thousands of American homeowners are to make lower mortgage repayments under a sweeping programme of loan renegotiations brokered by the US government to slow down the rate of property repossessions.

Treasury officials yesterday announced a programme restricting repayments to 38% of household income for many borrowers. The arrangement will involve loans packaged by the mortgage giants Fannie Mae and Freddie Mac, with the cooperation of retail banks.

In some cases, the term of mortgages will be extended to as much as 40 years.

The programme came as the US bank Citigroup said it was halting repossessions for most of its struggling mortgage borrowers. Citi said its moratorium on foreclosures applied to all clients willing to work “in good faith” to restructure mortgages, as long as they had sufficient income to make payments of some sort.

Political momentum has been gathering for aid to homeowners to help “Main Street” alongside the US treasury’s rescue of Wall Street banks.

Citi, which is getting a $25bn equity investment from the US government, has written off more than $70bn in losses on mortgages and derivatives, making it one of the worst-hit surviving institutions. In addition to freezing foreclosures, the financial services group is launching a programme to pre-empt problems with some 500,000 borrowers not yet behind on payments, but who may need help.

Sanjiv Das, chief executive of Citi’s mortgage arm, said: “We will pre-emptively help homeowners before they become delinquent, which is critical to avoiding the loss of a home and protecting their credit score.” The Mortgage Bankers’ Association recently revealed that

4 million US borrowers are at least one payment behind on loans, with 500,000 in the process of losing their property.

But experts say a halt on foreclosures is far from a panacea. Barry Zigas, director of housing policy at the Consumer Federation of America, said: “A moratorium on foreclosure will be effective at stopping foreclosure - it won’t be effective at stopping the underlying reasons why people are in trouble.”

The initiatives came amid fresh signs of the turmoil gripping the financial sector. Late on Monday, American Express revealed it was turning itself into a bank, which makes it eligible for aid under the US government’s $700bn (£444bn) bail-out fund. American Express has struggled with a surge in bad debts on customers’ cards.

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