FDIC: U.S. "will step in" on subprime if needed

By John Poirier

WASHINGTON (Reuters) - The chief of the Federal Deposit Insurance Corp warned on Thursday that if industry solutions fail to help subprime mortgage borrowers, the odds of government involvement will increase.

With about 2 million subprime mortgages due to reset at sharply higher interest rates, FDIC Chairman Sheila Bair urged Wall Street to act quickly to help modify mortgages under a Treasury-backed industry plan because time is of the essence.

"I very much believe in the market," Bair said in remarks prepared for a Bear Stearns investor conference in New York. "But if market solutions fail to solve the problem, government will step in."

Without giving any details, Bair said regulatory measures may be needed to bring greater transparency. Regulators may want to further review capital requirements for structured financings based on external ratings, she said.

A copy of her prepared remarks was released in Washington. They represented the strongest indication so far that banking regulators are mulling action to address some of the causes that helped roil global financial markets.

If home foreclosures fail to abate, there will be greater downward pressure on home prices and an even bigger drag on growth to the U.S. economy, Bair said.

Another outcome is the potential for greater governmental involvement in the market and in contractual relationships, she said, without elaborating.

In December, the White House announced a plan to temporarily freeze low introductory rates on subprime mortgage loans for five years so that some borrowers would not face the loss of their homes when the loans reset at higher interest rates.

The plan would also mitigate losses for investors who bought mortgage-backed securities in complex structured products that lacked transparency.

Credit rating agencies have been widely criticized for failing to properly classify the risks involved in the different tranches within these complex structures.

"Beefing up disclosure requirements may be another necessary measure," she said. "It's a real challenge for regulators to set capital requirements without understanding the risks of underlying assets."

Bair said ratings agencies have taken "positive steps" to improve transparency when rating complex structures, but warned that external ratings were no substitute for rigorous due diligence.

"Ratings must not be a proxy," she said.

(Editing by Brian Moss)