By Steve Schifferes
Economics reporter, BBC News, Washington
A high-ranking US government official has told the BBC that it is up to private parties to work out the solution to the credit crisis.
Up to two million US families could lose their home in the next year
The US Treasury Under-Secretary for Domestic Finance, Robert Steel, said that government intervention could be counterproductive.
And he warned such action could cause credit and mortgage markets to dry up.
Up to two million US families with sub-prime mortgages could lose their homes as the credit crunch intensifies.
Banks and mortgage companies are tightening lending up further as world credit markets have frozen up, with investors refusing to buy mortgage-backed securities.
Wave of foreclosures
Mr Steel said that the focus of the government efforts was to encourage lenders not to repossess homes, by bringing them together with borrowers.
He pointed out that half of borrowers never talked to lenders before going into arrears.
"We need to encourage lenders to be flexible, so that the people who figure this out can stay in their homes," he said
But he pointed out that some level of foreclosure was inevitable.
"There is a natural rate of foreclosure, in good times or bad, in the economy. And that is just the nature of how our economy works. Not everything can be successful."
The government is increasing its level of funding to debt counselling and other local services.
However, so far there seems to be little increase in mortgages that have been renegotiated on better terms.
Financial institutions need to play their part, Mr Steel says
According to Mark Zandi, the chief economist of ratings agency Moody's, only 1% of sub-prime mortgages have been modified so far.
But recently one of the biggest sub-prime lenders, Countrywide, announced a plan to help 80,000 borrowers with $16bn in outstanding mortgages to renegotiate terms.
Restoring the credit markets
Mr Steel was optimistic that "things were returning to normal" in the credit markets.
However, he admitted that "it's going to take a while for this to work through".
And he was particularly encouraged by the plan by three big US banks to set up a special $80bn superfund to try to restore investor confidence by pooling high-grade, safer investments together in one pool - a plan that was put together in the US Treasury under the auspices of Mr Steel.
The hope is that investors will buy into this fund, and it will unfreeze the short-term asset-backed commercial paper market.
The Under-Secretary admitted that there were still problems remaining in this area.
But he said he hoped the fund would "provide a perspective on how to think about this issue".
It was the logical outcome of the series of discussions between the US Treasury and the private sector after the crisis broke, he said.
Mr Steel explained that the government had "convened people here" (at the Treasury) to understand how the market was thinking, and was supportive of the private sector plan that emerged from that meeting.
The department even issued a press release supporting the proposal.
However, as this fund is still being created, there are still doubts as to whether investors or other international banks will join in this effort.
Mr Steel said that while there was no "plan B", the markets were already adjusting by selling off some of the distressed debt.
The size of that adjustment also became clearer this week when big US investment Merrill Lynch revealed a $8bn loss on its sub-prime lending portfolio.
And earlier this week the head of the IIF international bankers' association, Josef Ackermannl, also the boss of Deutsche Bank, said that banks will have to take their losses - but that their underlying profits were strong enough to stand the strain.
Mr Steel said that the US economy was still showing underlying strength and the Treasury was not worried about a recession.
But he accepted that the problems in the housing market would provide a "penalty to growth".
"Housing has been providing a headwind to the economy, and there is a penalty to growth from the current situation in housing," he said.
The size of that penalty is still unclear. Both the IMF and the US Homebuilders Association expect the US growth rate in the first half of the year to be cut in half, and the US Federal Reserve has reduced its economic forecast by three-quarters of a percentage point as a result of the housing slowdown.
Next week it meets to decide US interest rates. And many economists believe that the fate of the US economy is now as much in the hands of the Fed as the Treasury.