By Karey Wutkowski
WASHINGTON (Reuters) - A top U.S. banking regulator said on Thursday the government must do more to guarantee mortgage loans to persuade lenders to modify their terms and help ward off a rising wave of foreclosures.
Federal Deposit Insurance Corp Chairman Sheila Bair told the Senate Banking Committee that regulators were working with the Bush administration to create a loan guarantee program under which the government would bear some of the risk of future losses.
"We're having very good discussions with Treasury," Bair said, suggesting loan guarantees would be an incentive for lenders to modify loans and possibly slow defaults. "We're sharing some ideas, and I know they're looking at some other things as well."
Treasury's official appointed to run a financial bailout for financial firms, Neel Kashkari, said "it's something we're very seriously considering."
Bair made clear that she considers existing voluntary loan modification programs inadequate. "We are falling badly behind and more needs to be done," she said on a day when RealtyTrac announced U.S. home foreclosure filings in the third quarter jumped 71 percent from a year earlier.
Kashkari said Treasury expects banks that share in a $250-billion capital injection will use the money to lend rather than to boost salaries and pump up dividends.
"We want our banks to lend," said Kashkari, interim assistant Treasury secretary for financial stability, who was pressed by skeptical lawmakers to explain how banks are being held to account.
Treasury already has allocated half of the money to nine larger banks in exchange for preferred shares. The nine hold about half the nation's deposits and were essentially arm-twisted into signing on for the first $125 billion in capital infusions.
"I think it will be a few weeks before the next batch are actually funded," he said, but added $250 billion should be "out the door by the end of the year."
He said the next $100 billion of money authorized under the $700 billion bailout program has been requested from Congress.
Bair and Kashkari testified before the committee on the regulatory response to the financial crisis sweeping global markets. In the House of Representatives, the oversight committee was also holding a similar hearing.
The bailout package that Congress approved early this month gives the Treasury Department the power to offer loan guarantees as an inducement for lenders to modify loans, Bair said.
"Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards," Bair said. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."
Bair did not mention any dollar figure for such a program but the Wall Street Journal reported on Thursday that officials were considering something on the order of $40 billion.
SUPPORT GROWING
Senate Banking Committee Chairman Christopher Dodd effectively endorsed the idea, noting widespread discontent that authorities' emphasis so far appeared to be on helping the banking industry.
"Doing more for homeowners is the one policy solution that a majority of ... Americans said they support," Dodd said. "If there were ever a time that demanded that we think anew, this is it."
Treasury's Kashkari said the capital infusions have given the market more confidence but conceded conditions remain shaky.
"Since the announcement of our capital purchase program, we have seen numerous signs of improvement in our markets and in the confidence in our financial institutions," he said. "While there have been recent positive developments, the markets remain fragile."
U.S. stock markets surrendered early morning gains and were down more than 1 percent midday. Credit markets showed some signs that a recent deep freeze was beginning to thaw.
Testifying before the House panel, former Federal Reserve Chairman Alan Greenspan said he was shocked by the breakdown in U.S. credit markets.
"SHOCKED DISBELIEF"
"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity ... are in a state of shocked disbelief," said the former Fed chief, who retired in January 2006 after 18-1/2 years in the job.
Greenspan has been criticized for not foreseeing the bubble developing in housing and for keeping interest rates low for an extended period while lending practices slackened.
He said he was concerned in 2005 that investors were underestimating risks, adding "this crisis, however, has turned out to be much broader than anything I could have imagined."
Another regulator now facing stiff scrutiny, Securities and Exchange Commission Chairman Christopher Cox, told the same committee the crisis demonstrated that regulatory gaps needed to be closed and rules that allowed investment banks to operate loosely must be tightened.
"The lessons of the credit crisis all point to the need for strong and effective regulation, but without major holes and gaps," he said.
U.S. investment banks no longer exist, since all have either gone bankrupt, been acquired or converted into bank holding companies as the credit crisis raged.
(Additional reporting by Rachelle Younglai, Mark Felsenthal, Glenn Somerville and David Lawder; writing by Glenn Somerville,
Editing by Tom Hals)
