The Treasury Department is reviewing an Federal Deposit Insurance Corp. proposal, which includes using credit enhancements as a tool to encourage loan modifications.

The Treasury Department is facing renewed congressional pressure to address rising foreclosures after committing $250 billion to recapitalize the banks. Treasury assistant secretary Neel Kashkari told Senate Banking Committee Christopher Dodd, D-Conn., that department officials are looking hard at the FDIC proposal, along with other ways to avoid "preventable" foreclosures.

"We are in a policy process of understanding the proposal - understanding the details," the head of Treasury's troubled asset relief program testified. "We need to get moving on this," Dodd said, and reminded the Treasury official that foreclosures are the "root cause" of the financial crisis.

FDIC chairman Sheila Bair stressed the credit enhancements would give servicers a "powerful" incentive to modify loans. Further, it would provide greater certainty for investors that they won't incur greater losses if borrowers default again.

"We are having good discussions with Treasury," she told the banking committee members. "Unless we can do something to address the underlying fundamentals of dealing with the mortgage foreclosures, we are going to be wasting a lot of money," said Sen. Richard Shelby, R-Ala.

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