NEW YORK (Reuters) - A US mortgage meltdown has its roots in lending discrimination against African-American and Hispanic communities and requires federal intervention to prevent it from crippling municipal services, civil rights activist Rev. Jesse Jackson said yesterday.

Jackson told the Reuters Housing Summit in New York that nearly 40 percent of sub-prime loans went to black and Hispanic families, many of them in districts once shunned by discriminatory "redlining" lenders who later devised a way to profit there by selling a flawed financial product.

"They began to stereotype and target and cluster whole communities. It's kind of like reverse redlining," Jackson said.

Jackson estimates that nearly half of those borrowers could have been eligible for regular loan packages, but instead were locked into mortgages that threaten to balloon out of their ability to pay when the adjustable interest rates reset.

"It suggests that if fair lending laws had been enforced ... we would not have had this global economic crisis," Jackson said. "But while it started by unenforced civil rights laws, the bleeding has not stopped there. It's now engulfing the budgets of cities and counties and states."

Jackson also said that the Department of Justice was slow to respond, if at all, to concerns of lending discrimination.

An estimated 1.5 million sub-prime mortgages, traditionally targeted at borrowers with poor credit histories, will reset to higher interest rates this year, putting many owners at risk of losing their homes. Another 500,000 will reset in 2009, according to Federal Reserve estimates.

Jackson said the federal government should institute a halt to foreclosure proceedings and authorise the Federal Housing Administration or another body to start a major restructuring of sub-prime loans, with lower interest rates and payments spread out over a longer period.

He also called on state attorneys general to subpoena the major lenders on their loan practices and impose penalties on those who have violated the law.

He described President Bush's plan to offer $152 billion in tax rebates this year to fend off a possible recession as irrelevant to the needs of home owners facing foreclosure and ignoring the cause of the crisis.

¿ A rapidly deteriorating US economy will cause home prices to drop by 20 percent peak-to-trough, a leading economist said yesterday.

Mark Zandi, chief economist and co-founder of Moody's Economy.com, said he also expects a recession in the first half of this year. Zandi, speaking at the Reuters Housing Summit in New York, said this is a "significant" change from the Moody's Economy.com outlook published in December, which called for a 13 percent drop.

He expects home sales to hit bottom this spring, housing starts to reach a nadir this summer, and house prices to trough in the spring of 2009.

"Three months ago, I expected the economy to skirt a recession. Now, I expect it to suffer a recession (in the) first half of 2008," he said.

"To be more precise, the economy is contracting. It's been contracting for December, January and probably February," he said. "Another three, four, five months of contraction and that would be a recession."

Zandi expects the Federal Reserve to slash the federal funds rate, currently at three percent, by another percentage point this year. He also said the US central bank "misjudged" the severity of the housing downturn and credit conditions.

"They were clearly slow to respond," he said of US policymakers.

Zandi said he has been in contact with different US Federal Reserve and Treasury officials.

"They now seem to be on high alert, fully engaged and thinking creatively about what they can do and what is next," he said.

While monetary policy has helped the housing market in terms of lower resets on adjustable-rate mortgages, it is not going to be enough to fix all the issues the sector faces.

"It is as if the pipes are broken and you can pump more water through, but it is not going to get distributed because it is going to leak out," he said.

Zandi said rapidly rising foreclosures is high on his list of significant problems facing the US economy. "The surge in foreclosures and delinquencies on mortgages is accelerating, not abating, and obviously we are at levels we have never seen before," he said. "This is a significant problem for the economy."

The surge in foreclosures is putting further downward pressure on the housing market because it adds to the inventory of homes for sale, which is already at a lofty level.

"This puts further pressure on house prices and therefore on the ability and willingness of consumers to spend," he said.