Homeowners struggling to meet their mortgage payments would be able to sell their homes to the local authority and rent them back as tenants under radical proposals being considered by the government to prevent the misery of repossession.

Emergency measures to allow families to keep a roof over their heads are being drawn up as the scale of repossessions proceedings becomes increasingly apparent. In Newcastle upon Tyne alone, the newly nationalised Northern Rock is monopolising at least one day a week in the county court to pursue defaulting borrowers.

The latest rescue package reflects growing fears about the seriousness of the crisis, with some analysts predicting that house prices could fall by 35 per cent. Ministers are worried about the 13 per cent of fixed-rate borrowers whose cheap deals expire this year, some of whom may by then be in negative equity and therefore unable to switch to a new fixed rate with another lender.

Caroline Flint, the Housing Minister, told The Observer yesterday: 'I am looking at what more we can do with our colleagues in local authorities - what they can do as well as actually building [homes], and what support they could give to people who might be feeling under pressure on mortgages.'

Asked to confirm that she was considering rent-back schemes, enabling homeowners to become council tenants in their original houses rather than be repossessed, she said: 'We are looking at that. I have to be certain that the choices I make do actually help to limit the damage; and, importantly, is it a short-term fix or a long-term impact?'

The scheme would be expensive. Councils would need central government funds to buy the houses. But it could save on the long-term costs of rehousing homeless families and allow councils to increase their housing stock at relatively low prices.

Flint also suggested the Bank of England could increase the size of its £50bn fund designed to stimulate mortgage lending, admitting she was 'disappointed' that the cash that has been pumped in so far had not led to cheaper home loans. 'No doubt our colleagues in the Bank and the Monetary Policy Committee will also be looking at the issue in terms of whether any extra has to be provided,' she added.

She has suggested that country landowners could be freed to build cheap houses for their workers on their own land, in a return to the system of 'tied cottages'.

'It's recognising that sense of community and how everybody has a part to play,' she said.

Debt advice experts warned yesterday that, despite the Chancellor's calls for leniency from lenders, Northern Rock was now aggressively pursuing defaulting borrowers as part of its efforts to repay the £25bn rescue package it received from the government. Chris Jary, director of Action for Debt in Durham, said: 'There used to be a small group of sub-prime lenders who you knew would always go straight to court. But recently it's Northern Rock who have become more aggressive, taking legal action as soon as they can.'

House repossessions at Northern Rock are running at twice the rate they were before the bank was nationalised in February.