Federal regulators told Congress Thursday they’re working on a plan that could help many distressed homeowners escape foreclosure in a global financial crisis that former Federal Reserve Chairman Alan Greenspan warned will get worse before it gets better.

Greenspan called the banking and housing chaos a “once-in-a-century credit tsunami” that led to a breakdown in how the free market system functions.

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.”

The longtime Fed chief acknowledged under questioning that he had made a “mistake” in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan called it “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”

His much-anticipated appearance came as committees in both the House and the Senate held competing hearings on the financial crisis. At one such forum, a senior Treasury official said the Bush administration intends to get a program to help struggling homeowners revise mortgages up and running soon.

Neel Kashkari, who is overseeing the government’s $700 billion financial rescue effort, told the Senate Banking Committee that the new plan could include setting standards for changing mortgages to make them more affordable and giving loan guarantees to banks that meet them.

“We are passionate about doing everything we can to avoid preventable foreclosures,” he said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the same Senate panel that the government needs to do more to help tens of thousands of home borrowers avert foreclosure, including setting 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.

Greenspan told the House Oversight Committee he was wrong in believing that banks would be more prudent in their lending practices because of the need to protect their stockholders.

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 him for contributing to the problem by leaving interest rates too low for too long and for failing to regulate risky banking practices.

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.

“My question for you is simple,” Waxman told Greenspan. “Were you wrong?”

“Well, partially,” Greenspan said.

But he went on to assign 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.

He said what had been “a critical pillar to market competition and free markets did break down. And I think that, as I said, shocked me. I still do not fully understand why it happened.”

Committee members accused present and past federal regulators for not doing more to stop abusive practices or to go after wrongdoers.

Christopher Cox, chairman of the Securities and Exchange Commission, acknowledged to the House panel that “somewhere in this terrible mess, laws were broken.”

He said the government was doing the best it could to identify and pursue lawbreakers.

In the hearing before the Senate panel, Kashkari, the Treasury official overseeing the government’s $700 billion bailout program, said the administration was making “tremendous progress” in carrying out the bailout program enacted earlier this month.

As a result, there have been “numerous signs of improvement in our markets and in the confidence in our financial institutions,” he asserted.

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 swiftly and aggressively, said Banking Committee Chairman Sen. Christopher Dodd, D-Conn. Otherwise, “volatility and paralysis” will reign in the markets, he warned.

So far, the government has dealt only with the symptoms of the debacle, Dodd argued.

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.