President Bush performed an abrupt U-turn today and dropped his opposition to a wide-ranging Housing Bill that would pave the way for a bailout of America’s stricken mortgage industry. He did so as the House of Representatives and the Senate finally reached a deal on leglislation that would permit the Government to back Fannie Mae and Freddie Mac, the mortgage groups, in an emergency and to overhaul their supervision.

The Bill would also allow the Government to insure up to $300 billion (£150 billion) of refinanced mortgages and provide $3.9 billion to help the communities hit worst by the housing crisis by allowing local governments to buy and refurbish foreclosed homes.

Shortly before the House was expected to vote on the Bill, the President, who had said repeatedly that irresponsible homeowners and unscrupulous lenders should pay for their mistakes, announced a change of heart.

“We believe this is not the time for a prolonged veto fight, but we are confident the President would prevail in one,” a White House press secretary said.

The Senate is expected to vote on the Bill this week and, like the House, is forecast to approve the new legislation, since Democrats are broadly in favour of the measures and have control of both houses. Mr Bush’s U-turn shows just how serious a threat he perceives the housing crisis is to the American economy. Yesterday, the Mortgage Bankers Association said that mortgage applications in the United States had fallen by 6.2 per cent last week, compared with the previous week.

Mr Bush’s new stance will put him on a collision course with many of his Republican colleagues, although their opposition is not expected to be powerful enough to derail the process. John Boehner, of Ohio, the House Republican leader, is understood to have told colleagues that he would vote against the bailout Bill, which he thinks is unfair to taxpayers.

On Tuesday the non-partisan Congressional Budget Office forecast that a bailout of Fannie and Freddie would probably cost the taxpayer about $25 billion, although the office conceded that the figure was a rough estimate and that it depended on what form the rescue took.

The lawmakers reached agreement on the Bill ten days after the US Treasury and the Federal Reserve issued a joint statement in which they pledged several measures, some needing congressional approval, to prop up Freddie and Fannie if they decided they were necessary. These included the authority to buy newly issued shares in the groups, to extend credit lines and to offer them cheap financing through the Fed’s discount window.

Henry Paulson, the US Treasury Secretary, said: “I am, as you can imagine, pleased the House and Senate reached an agreement on GSE reform.” Fannie and Freddie — more properly named the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, respectively — are government-sponsored enterprises (GSEs) because, although public companies, they are chartered by the government.

A failure of Freddie and Fannie would drive up mortgage payments in the United States significantly, just as a crucial source of financing dried up. Moreover, the value of all the bonds they guaranteed would plummet as the safety net was removed. That would have a domino effect across the debt market, affecting everything from car loans to student loans.