FDIC Chairwoman Sheila Bair said yesterday in Baltimore that the one step the federal government still needs to take in this financial crisis is to stop unnecessary foreclosures. And it can do so, she said, by spending about $24 billion of the bank bailout money on a program to modify troubled loans. Bair, breaking with the Treasury Department, has been advocating for a program to keep homeowners out of foreclosure by modifying the interest rate or other terms of their mortgages. As part of that, the government would guarantee a portion of the loans in case the homeowner later defaulted. Bair estimates such a program could prevent 1.5 million foreclosures by the end of next year and help stabilize home prices. The proposal has support among Democrats in Congress. But Treasury Secretary Henry M. Paulson Jr. has resisted tapping the $700 billion Troubled Assets Relief Program for loan modifications. He said in a House hearing this week that the program's best use is to help banks lend more money for affordable mortgages. Still, Bair, speaking at a lecture series sponsored by Johns Hopkins' Carey Business School at the Renaissance Hotel, said she continues to talk with Paulson, Congress and President-elect Barack Obama's transition team about the modification program and is hopeful it will be launched soon. "There is no perfect proposal. If there was a perfect proposal, we would have come up with it a long time ago," Bair said after her speech. "This is absolutely the best thing out here. We have proven it can work at IndyMac." The FDIC took over IndyMac Bank in the summer and has been modifying thousands of mortgages. One audience member asked if the FDIC had any input into how banks use $250 billion of TARP money, after reports that some are not using it to lend but instead are buying competitors or paying dividends to shareholders. Bair said there are restrictions on what the money can be used for and bank examiners will be looking at that. She added that if a strong bank buys a weak one that is a good use of the money if it prevents a failure. Pointing to recent market volatility, Bair said she is concerned that investors are transitioning from "irrational exuberance to irrational despair." Though bank failures will increase and third-quarter earnings will be substantially lower than a year ago, she said, the vast majority of banks are well-capitalized and in far better shape than during the last banking crisis in the early 1990s. So far, 19 banks have failed this year. Reared in Kansas by parents who grew up in the Depression, Bair said she was taught traditional values and common sense. "We need to get back to the basics," she said. For banks, that means prudent underwriting and giving consumers products they understand, she said. "We will get through this and be stronger for it." Bair has been mentioned as a potential nominee for Treasury Secretary under the Obama administration. "I'm very happy with the job I've got," she said.