The US House of Representatives last night approved a sweeping rescue Bill for the housing industry that would permit the government to back Fannie Mae and Freddie Mac, the groups that underpin America’s mortgage market, in an emergency and overhaul their supervision.

The house voted 272 to 152 in favour of the Bill in a process which split the Republicans, many of whom are opposed to using taxpayers’ money to prop up the housing market.

The vote came just hours after President Bush performed an abrupt U-turn and dropped his opposition to the contentious bill.

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 communities worst hit by the housing crisis, allowing local governments to buy and refurbish foreclosed homes.

President Bush’s change of heart came after he had said repeatedly that irresponsible homeowners and unscrupulous lenders should pay for their mistakes.

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

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.

The President’s U-turn shows just how serious a threat he perceives the housing crisis to be 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 from the previous week.

The President’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, said he was disappointed that President Bush had decided to put taxpayers on the hook for “billions and billions of dollars”.

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 would depend on what form the rescue took.

The lawmakers have 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 it was 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.”

Although Fannie and Freddie — more properly the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, respectively — are 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, with a subsequent domino effect across the debt market.

Foundations

— Fannie Mae and Freddie Mac are fundamental to the smooth running of the US housing market. They buy mortgages from banks and other lenders and package them into bonds, which they sell to pension funds and other investment firms

— The banks use the money they receive from selling their mortgages to Fannie and Freddie to make further loans

— They guarantee the payments on the mortgage bonds they create and own or guarantee more than half America’s $12,000 billion of outstanding mortgages