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

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 and has been met with resistance from the Treasury Department and the White House.

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.

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.

She also said it is "critically important" for community banks to participate in the capital injection plan, which is part of the $700 billion Troubled Asset Relief Program (TARP).

She said more than 1,000 community banks have already applied for TARP funds. November 14 was the deadline for public banks to apply for the program.

The FDIC is also looking at adjusting its temporary liquidity program, which provides guarantees for new senior unsecured debt to encourage more interbank lending.

The program is currently in effect, and banks have until December 5 to decide whether to opt out of it. If they stay in the program, the banks will be assessed fees in exchange for the debt guarantees.

"We are considering suggestions with regard to whether the debt guarantee program should cover very short term funding or whether we should have a tiered fee structure based upon the maturity of the debt guaranteed," Bair said.

(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)