FDIC's Bair: New anti-foreclosure plan "essential"

By Karey Wutkowski

WASHINGTON (Reuters) - A top U.S. bank regulator said on Tuesday it is "essential" for the Treasury Department to use its authority under the $700 billion financial bailout law to provide loan guarantees and credit enhancements to stem the flood of home foreclosures.

"We believe that it is essential to utilize this authority to accelerate the pace of loan modifications in order to halt and reverse the rising tide of foreclosures that is imperiling the economy," Federal Deposit Insurance Corp Chairman Sheila Bair said in prepared remarks to be delivered to the House Financial Services Committee.

Bair said current federal programs to encourage servicers to modify home mortgages are not enough and an estimated 4 million to 5 million mortgages will enter foreclosure over the next two years if nothing is done.

The FDIC has proposed to prevent about 1.5 million foreclosures under a plan that would reward participating lenders by sharing the cost of defaults on restructured loans.

It is estimated the plan could cost the federal government about $24 billion from the $700 billion Troubled Asset Relief Program (TARP). It has been met with resistance from the Treasury Department and the White House, who have said the TARP is supposed to be used for investing, not spending programs.

But Bair said on Tuesday that the FDIC plan would efficiently use federal money and would provide returns "in terms of our housing markets and, by extension, the economic well-being of our communities."

SUPERVISION, LENDING

Bair also said bank supervisors will be closely watching to ensure that banks are using government capital injections for lending.

Bank supervisors have broad discretion over financial institutions' business activities if they deem any activities are not in line with "safety and soundness" principles.

"Ongoing supervisory assessments of bank earnings and capital will take into account how available capital is deployed to generate income through expanded lending," Bair said.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has said lawmakers may object to authorizing the release of the second half of the $700 billion bailout fund if banks do not sufficiently show an increase in lending.

Bair said supervisors will be making sure that necessary cost-cutting comes from executive pay and dividends.

"The goal of providing government support is to ensure that such adjustments are made mostly in areas such as dividend policy and the management compensation, rather than in the volume of bank lending," Bair said.

The capital injection program currently restricts lavish executive pay, including golden parachutes for departing executives, and forbids companies to boost dividends or buy back their own stock.

Some Democratic lawmakers have threatened to add more conditions to the capital injection program, including an outright ban on dividends and setting lending requirements.