FDIC's Bair says U.S. working on home loan program

WASHINGTON (Reuters) - U.S. banking regulators are working closely with the Bush administration to create a loan guarantee program that would serve as an incentive for servicers to modify home loans, the chairman of the Federal Deposit Insurance Corp said on Thursday.

Sheila Bair said the $700 billion financial rescue plan passed earlier this month gives the U.S. Treasury Department the power to use loan guarantees and credit enhancements to facilitate loan modifications and prevent avoidable foreclosures.

"Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards," Bair said in prepared remarks to be delivered before the Senate Banking Committee. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

Bair did not immediately give an estimate for how large such a loan guarantee program could be, but said the bailout legislation provides "authority that could hold significant promise for future loan modifications."

"The FDIC is working closely and creatively with Treasury to realize the potential benefits of this authority," Bair said.

Bair also said the bulk of the U.S. banking industry is healthy and well-capitalized, but that FDIC is "prepared to do whatever it takes" to preserve confidence in the financial system.

The plans already announced under the bailout legislation should give banks the confidence to resume normal lending, Bair said.

The Treasury in recent days has outlined a plan to directly inject $250 billion of capital into U.S. banks in exchange for preferred shares. Nine of the largest U.S. banks were essentially arm-twisted into signing on for the first $125 billion in capital infusions.

The FDIC has also enacted a temporary liquidity program that expands deposit insurance to cover all transaction deposit accounts. It also provides a guarantee to banks' new unsecured senior debt.

But Bair said more needs to be done to address the root problem of home foreclosures. "Minimizing foreclosures is important to the broader effort to stabilize global financial markets and the U.S. economy," Bair said.

(Reporting by Karey Wutkowski; Editing by Chizu Nomiyama)