Bair said the FDIC is working "closely and creatively" with the Treasury on the plan, saying the recently passed financial rescue legislation gave the Treasury the authority to offer such incentives to servicers helping borrowers to avoid foreclosure.
"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."
The plan has gained the support of Senate Banking Chairman Christopher Dodd, who urged the Treasury to use its new authority to spur servicers to modify loans.
"This slender provision alone can help countless deserving Americans escape the foreclosure trap set by predatory lenders," Sen. Dodd said in prepared remarks.
Several senior federal officials appeared before the Senate Banking Committee to testify on the historic steps taken by the U.S. government in recent weeks and months to stem the financial crisis.