U.S. bank regulator urges mortgage loan guarantees

By Karey Wutkowski

WASHINGTON (Reuters) - A top U.S. banking regulator said on Thursday the government must do more to guarantee mortgage loans to persuade lenders to modify their terms and help ward off a rising wave of foreclosures.

Federal Deposit Insurance Corp Chairman Sheila Bair told the Senate Banking Committee that regulators were working with the Bush administration to create a loan guarantee program under which the government would bear some of the risk of future losses.

"We're having very good discussions with Treasury," Bair said, suggesting loan guarantees would be an incentive for lenders to modify loans and possibly slow defaults. "We're sharing some ideas, and I know they're looking at some other things as well."

Treasury's official appointed to run a financial bailout for financial firms, Neel Kashkari, said "it's something we're very seriously considering."

Bair made clear that she considers existing voluntary loan modification programs inadequate. "We are falling badly behind and more needs to be done," she said on a day when RealtyTrac announced U.S. home foreclosure filings in the third quarter jumped 71 percent from a year earlier.

Kashkari said Treasury expects banks that share in a $250-billion (155 billion pounds) capital injection will use the money to lend rather than to boost salaries and pump up dividends.

"We want our banks to lend," said Kashkari, interim assistant Treasury secretary for financial stability, who was pressed by sceptical lawmakers to explain how banks are being held to account.

Treasury already has allocated half of the money to nine larger banks in exchange for preferred shares. The nine hold about half the nation's deposits and were essentially arm-twisted into signing on for the first $125 billion in capital infusions.