U.S. Working on Plan to Help Homeowners Refinance

The federal government is working on a loan-guarantee plan that could help many homeowners escape foreclosure, a banking regulator told Congress Thursday. At the same time former Federal Reserve Chairman Alan Greenspan said the financial crisis will get worse before it gets better.

Accused of contributing to the meltdown, but denying that it was his fault, Greenspan told a House panel the crisis left him — an unabashed free-market advocate — in a "state of shocked disbelief."

Federal regulators told Congress they were making steady headway in confronting the worst financial crisis since the 1930s as committees in both the House and the Senate held hearings on a contagious financial collapse that has infected global markets.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the Senate Banking Committee that the government can do more to help tens of thousands of home borrowers avert foreclosure. She suggested the government set standards for modifying mortgages into more affordable loans and providing loan guarantees to banks and other mortgage services that meet them.

"Loan guarantees could be used as an incentive for servicers to modify loans," Bair said. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

The FDIC is working "closely and creatively" with the Treasury Department on such a plan, she said.

While Bair, a Bush appointee and independent regulator, has publicly nudged the administration in recent months to go further on remedies for troubled home borrowers, Democrats have voiced vigorous support for her and have applauded her public pleas on this front.

On the other side of the Capitol, Greenspan, who stepped down in February 2006 after serving as Fed chairman for 18 1/2 years, was asked to explain his role in the crisis.

Some critics have blamed Greenspan for contributing to the problem by leaving interest rates too low for too long and for failing to regulate risky banking practices such as the issuance of subprime mortgage. But he put the blame on soaring mortgage foreclosures on overeager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward.

Greenspan called the global financial crisis is a "once in a century credit tsunami" that policymakers did not anticipate.

He said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a "state of shocked disbelief." And Greenspan also blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said. "Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."

He told the House Government Oversight and Reform Committee that a necessary condition for the crisis to end will be a stabilization in home prices but he said that was not likely to occur for "many months in the future."

Committee Chairman Henry Waxman, D-Calif., suggested that Greenspan contributed to "irresponsible lending practices" by rejecting appeals that the Fed intervene to regulate a surging subprime mortgage industry.

"The list of regulatory mistakes and misjudgments is long," Waxman said of oversight by the Fed and other federal regulators.

In other testimony, Neel Kashkari, a Treasury Department official who is overseeing the government's $700 billion bailout program, told the Senate Banking Committee that the administration was making "tremendous progress" in carrying out the bailout program enacted earlier this month.

There have been "numerous signs of improvement in our markets and in the confidence in our financial institutions" since the program was started, he said.

Still, Kashkari cautioned that "while there have been recent positive developments, the markets remain fragile."

The administration must move to resolve the deepening financial crisis as swiftly and aggressively as it has so far addressed only the symptoms of the debacle, said Sen. Christopher Dodd, D-Conn., the Banking Committee chairman.

Otherwise, continued "volatility and paralysis" will reign in the markets, he warned.

Dodd said he was troubled by recent reports that some major banks receiving multibillion-dollar cash injections from the government under the rescue plan are weighing using the money to buy up other institutions rather than making loans.

Just as it is crucial to stabilize U.S. banks, "it is absolutely imperative" that homeowners be helped to avoid foreclosure, he said.

Sen. Charles Schumer, D-N.Y., said that by not setting conditions on banks in return for the government injections of money, "We're feeding them a little too much dessert and not making them eat their vegetables."

Schumer said he's "still not convinced" that banks receiving the government money should continue paying dividends to their shareholders.

Greenspan said that when home prices finally stabilize "the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk."

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said. "Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."

Greenspan called the $700 billion rescue package passed by Congress on Oct. 10 "adequate to serve the need" and said that its impact was already being felt in markets.

Greenspan's critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed's powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.