U.S. weighing troubled mortgage loan guarantees

WASHINGTON (Reuters) - U.S. officials said on Thursday they were weighing the possibility of government guarantees for troubled mortgage loans to try to induce lenders to modify terms and slow a rising tide of home foreclosures.

Federal Deposit Insurance Corp Chairman Sheila Bair told the Senate Banking Committee that voluntary loan modification programs weren't working well enough and said talks on a guarantee program were under way with the Treasury Department.

The Treasury official running a congressionally approved bailout plan for financial firms confirmed that loan guarantees were possible, but would not say when such a plan might be ready.

"We are looking at it very closely and working with our colleagues around the administration to understand the plan, to understand how it would be implemented ... and how it would interact with the other programs," said Neel Kashkari, interim assistant secretary for financial stability. "It's something we're very seriously considering."

U.S. home foreclosure filings in the third quarter were up 71 percent from the same period a year earlier, research firm RealtyTrac said on Thursday, even though foreclosure filings fell compared with August as some states slowed the process.

"We are falling badly behind and more needs to be done," Bair said, underscoring her frustration with the slow pace at which lenders have been modifying loans.

LEND, DON'T HOARD

Earlier this month, Congress approved a $700 billion program to buy up bad assets from financial firms in the hope of spurring fresh lending. Since then, the Treasury has said it would use $250 billion of that money to recapitalize banks.

Kashkari, facing a series of questions from skeptical lawmakers about how banks are being held to account, said the Treasury expects banks that receive a capital injection to use the money for loans rather than to boost salaries and pump up dividends.

"We want our banks to lend," he said.

The Treasury Department has already force fed $125 billion to nine large banks that hold about half of U.S. deposits.

"I think it will be a few weeks before the next batch are actually funded," he said, but he added the whole $250 billion should be "out the door by the end of the year."

Under the bailout legislation, the Treasury was given an initial $250 billion, but was required to request the next $100 billion installment from Congress. Kashkari said that request has been made.

As Bair and Kashkari testified before the Senate committee, other current and former officials were testifying on the financial crisis sweeping global markets before the House of Representatives Oversight Committee.

At the House hearing, former Federal Reserve Chairman Alan Greenspan said he was "shocked" at how U.S. credit markets had broken down and conceded that he was "partially" at fault for having resisted regulation of securities called derivatives.

RUNAWAY EXCESS

Greenspan, a staunch advocate of limited regulation during an 18-1/2-year Fed tenure that ended in January 2006, now faces harsh scrutiny for not acting to rein in excesses and has been criticized for keeping interest rates low for a lengthy period while the housing bubble grew.

Former Treasury Secretary John Snow, at the same House hearing, said there had been "a breath-taking breakdown" in bank risk management. He also claimed he had warned in 2005 that serious problems were developing with overleveraged financing.

Now officials are picking up the pieces.

Bair said the $700 billion financial bailout package clearly gives Treasury the power to offer guarantees as an inducement for lenders to modify loans.

"Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards," she said. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

Bair did not mention any dollar figure for such a program, but The Wall Street Journal reported on Thursday that officials were considering something on the order of $40 billion.

Senate Banking Committee Chairman Christopher Dodd effectively endorsed the idea, noting widespread discontent that the emphasis so far appeared to be on helping banks.

"Doing more for homeowners is the one policy solution that a majority of ... Americans said they support," he said. "If there were ever a time that demanded that we think anew, this is it."

Kashkari said Treasury's efforts to pump capital into the banking system had already given markets more confidence, but he conceded conditions remain shaky.

Greenspan said he had believed during his Fed tenure that lenders would not act recklessly because it would ultimately go against their own interest.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity ... are in a state of shocked disbelief," the former Fed chief said.

(Additional reporting by Rachelle Younglai, Mark Felsenthal, Glenn Somerville and David Lawder; writing by Glenn Somerville; editing by Gary Crosse)