FDIC, U.S. Treasury clash on anti-foreclosure plan

By Karey Wutkowski and Patrick Rucker

WASHINGTON (Reuters) - A top U.S. banking regulator unveiled a plan on Friday to prevent about 1.5 million foreclosures, breaking ranks with the Bush administration by demanding bailout funds be diverted from banks to consumers.

The Federal Deposit Insurance Corp said the plan would modify millions of delinquent mortgages and the government would reward participating lenders by sharing the cost of defaults on restructured loans.

The dispute over housing policy during the administration's final weeks spilled into the public as a the President George W. Bush administration renewed its opposition to using money from the $700 billion bailout fund to support such a foreclosure-prevention program.

"The FDIC proposal at the end of the day is a spending proposal," Treasury Interim Assistant Secretary Neel Kashkari told a Congressional hearing on Friday.

Kashkari said the Troubled Assets Relief Program (TARP), which the Treasury controls, was designed for making investments in the financial system, not giving aid.

FDIC Chairman Sheila Bair spent weeks lobbying Bush administration officials to fund her plan through TARP before announcing the initiative.

"I have never seen anything like this," said John Douglas, a former FDIC general counsel who is now a partner at law firm Paul Hastings Janofsky & Walker. "This is extremely unusual for an agency to get out in front of the administration like this."

Viewed narrowly, Bair's responsibility is to protect the solvency of the nation's bank insurance fund -- the pot of money that is used to protect depositors if a bank fails. Bair is taking an uncommonly broad view of her role and has become a consumer crusader through the housing crisis.

Douglas said that Bair does not have the power to unilaterally implement the foreclosure plan but that her approach is gaining currency.

"She certainly has a lot of cover from Democrats and even some Republicans," he said.

REGULATORY TENSION

Kashkari said Treasury Secretary Henry Paulson thinks the FDIC proposal "is a very interesting idea" and urged Congress to consider drafting legislation to create such a program. [nN14430931]

The White House said it is carefully reviewing the FDIC plan, but that it has to think about its potential cost.

The FDIC said its plan would cost the government about $24.4 billion, which could be paid from the TARP. Most of the money from an initial disbursement in that program has been injected as capital into banks.

The FDIC issued the proposal two days after Paulson publicly dismissed the idea.