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Wall Street drifted into the dusk on Friday, as investors closed out positions ahead of a holiday-shortened week and mulled the much-anticipated rescue plan for Detroit's auto industry.

The U.S. Treasury will use $17.4 billion of its Troubled Asset Relief Program piggybank on bridge loans for General Motors (nyse: GM - news - people ) and Chrysler designed to keep the automakers afloat while they restructure. The money will be doled out in two parts, an immediate $13.4 billion outlay followed by another $4.0 billion in February, with the goal of putting the car companies on a path to survival by the end of March. (See "A Band Aid Or A Bailout?")

GM shares jumped 15.3% but the broader market stalled Friday. The Dow Jones industrial average fell 26 points, or 0.3%, to 8,579, losing 0.6% on the week, and is down 35.3% in 2008. The S&P 500 gained 2 points, or 0.3%, to 888, adding 0.9% for the week to shave its year-to-date loss to 39.5%; and the Nasdaq climbed 12 points, or 0.8%, to 1,564 Friday, to lock in a 1.5% five-day gain and trim its 2008 decline to 41.0%. Ford Motor (nyse: F - news - people ), which requested a credit line from the government but not a bridge loan, gained 1.8% late in the session.

The banking sector was under the gun after Standard & Poor's cut its long-term debt ratings on a dozen firms. Morgan Stanley (nyse: MS - news - people ) and Citigroup (nyse: C - news - people ) were among the hardest hit of the companies affected by the cut, down 4.1% and 5.9%, respectively, which S&P attributed to continued pressure on complex financial institutions and the likelihood of ongoing volatility in funding markets. The SPDR KBW Bank (nyse: KBE - news - people )exchange-traded fund was off 1.5% near the close.

Traders in the energy pits sent oil prices lower Friday, as crude dropped $2.35, to $33.87 a barrel. The Organization of Petroleum Exporting Countries announced a 2.2 million barrel production cut on Wednesday, but move has been greeted with skepticism, as market watchers question whether the output decrease can overcome plunging demand caused by the global economic downturn. United States Oil Fund (nyse: USO - news - people ), an exchange-traded vehicle that tracks crude and other products, gained 0.9% though, as prices ticked higher in electronic trading after the January crude contract expired at day's end. (See "Market Judges OPEC Goal A Mere Paper Cut.")

Many small community banks are growing frustrated about their inability to access the government's $700 billion financial rescue fund, nearly two months after large banks began tapping the fund for much-needed capital.

Trade groups representing the banks complain that the delay is putting smaller institutions at a competitive disadvantage to publicly traded banks, more than 50 of which have received capital injections.

"They took care of Wall Street first, and it seems like Main Street got left behind," said Cynthia Blankenship, vice chairwoman of Bank of the West in Irving, Texas, which has $250 million in assets. Blankenship is also chairwoman of the Independent Community Bankers of America.

Some small banks, especially in areas such as California and Florida where the housing slump hit hardest, carry troubled real estate loans and likely would benefit from the government cash, Blankenship said.

Publicly traded banks have been eligible since the Treasury Department began the $250 billion capital injection program Oct. 14. The department opened it on Nov. 17 to about 3,800 small, privately held banks. A few publicly traded community banks already have received government money.

But the department has yet to issue the necessary guidelines for about 3,000 additional private banks. Most of them are set up as partnerships, with no more than 100 shareholders. They aren't able to issue preferred shares to the government in exchange for capital injections, as other banks can.

The Treasury Department has come under fire from members of Congress for not ensuring that the capital injections lead to more lending. The ICBA also argues that healthy smaller banks are more likely to use government money to make loans than are big banks that need to shore up their capital after writing down billions in mortgage-related losses.

Hundreds of the banks have applied for government money, the ICBA said in a letter Tuesday, as a precautionary step. But they can't access the money.

As a result, the government needs to figure out what it can receive in exchange for capital. Treasury officials say they are working on it but that the task is technically difficult.

"I have not seen a good answer yet," Neel Kashkari, director of Treasury's Office of Financial Stability, said Monday at a housing conference.

The vast majority of small banks are financially healthy, the ICBA says. Most did not get caught up in the housing meltdown that has so damaged Wall Street banks. But groups such as the ICBA say the rescue fund is supposed to be available to all healthy banks.

Banks that aren't eligible may lose out to other lenders that have received government money, the American Bankers Association added in a letter Dec. 5 to Treasury Secretary Henry Paulson.

"They can only watch while many of their competitors, strengthened by capital injections from the government, seize opportunities to meet credit needs of their communities," the ABA letter said.

Rep. Paul Kanjorski, a Pennsylvania Democrat, urged Treasury Secretary Henry Paulson in a letter Dec. 5 to open the program to the remaining small banks by the end of December.

Bert Ely, a banking consultant, said one possible solution would be for the government to receive some type of debt instrument rather than equity.

The Treasury Department is still struggling to hire enough staff to operate the capital-injection program, the Government Accountability Office, an auditing agency, said in a report earlier this month.

The department has handed out more than $155 billion to 77 banks. Of that sum, $115 billion has gone to the eight largest, including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co.

Some smaller banks that haven't yet been able to access the federal money are particularly irked by the efforts of nonbank financial institutions, such as life insurers and credit card companies, to get a slice of the money. At least four life insurers, including Hartford Financial Services Group Inc. and Genworth Financial Inc., are seeking to buy small thrifts to become eligible for the capital injections.

"The law was passed to help banks, and now companies are trying to get in front by becoming a bank," said Paul Merski, chief economist for the ICBA, which has about 5,000 members. "It's a little bit frustrating."

The banks that aren't eligible control just a small slice of the nation's banking assets. They make up about one-third of community banks, which the Federal Deposit Insurance Corp. defines as banks with less than $1 billion in assets.

Overall, community banks hold 11 percent of the industry's total assets, according to Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. Still, they play a vital role in small business and agriculture lending.

Community banks provide 29 percent of small commercial and industrial loans, 40 percent of small commercial real estate loans and 77 percent of small agricultural production loans, Bair said in congressional testimony last month. The FDIC doesn't have more precise data for the type of banks that aren't eligible for capital injections.

The delay in accessing the rescue money is just one aspect of the program that has frustrated small community banks and their directors.

The government has said the $250 billion it set aside for capital injections is intended for healthy banks. Yet the money has been widely referred to in press reports as a "bailout." As a result, many well-capitalized banks worry that if they take money from Treasury, their customers might see them as weak, Blankenship said.

Conversely, if they don't receive any funds, customers might wonder if they were turned down, she said. Treasury lists banks that have received money. But it won't say which banks have applied.

Finally, the ICBA has raised concerns about a measure governing the capital injections that would let the Treasury Department "unilaterally amend" the program. For example, Congress could require banks that have received government money to do more lending, Merski said.

"That's a bit concerning," said Dan Blanton, chief executive of Georgia Bank & Trust, based in Augusta, Ga. "If they decide they want to change the rules after you've taken the money ... you have to live with it."

Still, Blanton said his bank has applied for federal funds, though he hasn't decided yet whether to take the money if his bank is approved.

Federal agencies and trade groups have encouraged banks of all kinds -- including those not yet technically eligible -- to apply for the capital, to preserve the option. More than 1,000 community financial institutions have applied, Bair said in her testimony last month.

But some small banks that are eligible are saying no. Financial services firm Keefe, Bruyette & Woods said in a recent report that at least 82 banks have publicly said they won't seek funds.

Evergreen Federal Bank, based in Grants Pass, Ore., for example, has a link on its home page that reads, "We Don't Need a Bailout."

Matthew Hollister

What's the best way to stabilize plunging home prices? Treasury Secretary Hank Paulson and his staff are considering plans to push mortgage rates down to 4.5% in hopes of bringing buyers back into the moribund market. But many Democrats—in Congress and on President-elect Barack Obama's team—seem more set on pressing lenders to renegotiate troubled mortgages. That tack, championed by Federal Deposit Insurance Corp. head Sheila Bair, is aimed at trimming foreclosures and ending fire sales.

The differing approaches have led to a standoff. The government transition also makes it less likely that much will happen before Obama takes over in late January. That's worrisome: Without reducing foreclosures and ending the slide in home prices, it will be nearly impossible to stabilize banks and lessen the depth of the recession. And sharply rising unemployment has added new urgency: Last spring, Rod Dubitsky, Credit Suisse's (CS) head of research for asset-backed securities, projected 6.5 million foreclosures. With unemployment set to top 8% in 2009, he says up to 10 million families may lose their homes.

Still, policymakers remain split on the best approach. Bair repeatedly has been ahead of Paulson in calling for a stronger policy response, but when she first suggested pushing lenders harder to modify iffy mortgages last spring, it was dismissed. Since then she has instituted many of her ideas at IndyMac, the failed thrift the FDIC took over in July.

Bair's plan offers a guarantee to lenders that modify a mortgage so payments are trimmed to 31% of a homeowner's gross income. If they cut interest rates or stretch out the life of a loan, Washington would cover part of the lender's losses should a homeowner redefault. Bair says the plan would save 1.5 million homeowners at a cost of $24.4 billion. But skeptics say conflicting investor interests make it legally tough to modify securitized loans. And new statistics suggest that more than half of loans modified early this year are already at least 30 days past due—though Bair notes many early modifications did little to lower homeowners' monthly costs.

Paulson argues that Bair's plan is inappropriate for the Treasury's $700 billion rescue, because it would be an expenditure rather than an investment that would earn a return. The proposal also would reward banks for failed modifications instead of successful ones, since lenders would get subsidies only on loans that redefault.

Obama has said little about his plans, but many in Washington believe Bair's proposals will underpin his foreclosure strategy. And many in both parties (Republicans are especially annoyed) see her efforts to publicize the plan as a bid for a bigger job with Obama.

TREASURY'S OPTIONS

Will the incoming Treasury team clash with Bair, too? According to a recent Bloomberg story, Timothy F. Geithner, the head of the New York Fed and Obama's nominated Treasury Secretary, is also unhappy with Bair and wants her out before her term ends in 2011. An FDIC spokesman dismisses the idea of an ulterior motive as ridiculous, noting that Bair has championed foreclosure mitigation for years. The New York Fed and the Obama transition team declined to comment.

Treasury says it's studying several options, including the plan to subsidize low rates. Proponents say that by bringing new buyers to the market, the move could help end the pricing slide. "That will be far more important than any amount of loan modifications," says Ken Griffin, CEO of hedge fund giant Citadel Investment Group. Problem is, low rates would do little for those now facing foreclosure or trapped in homes worth less than their mortgages. And with just six weeks left, the Bush Administration is unlikely to launch a new program unless Obama's team signals that it backs the idea, says Howard Glaser, a mortgage industry consultant.

On Dec. 4, Fed Chairman Ben Bernanke proposed a variation on Bair's plan that also draws on the Treasury idea. Instead of guaranteeing losses, he said, Uncle Sam could subsidize reduced interest rates on modified loans. While more complex than the FDIC plan, it would "increase the incentive of [mortgage] servicers to be aggressive in reducing monthly payments," he said. With Geithner and Bernanke having worked closely throughout the crisis, the idea could gain traction as Obama's plans become clearer.

The White House and Treasury Dept. said they are likely to help U.S. automakers avert bankruptcy after Republican senators defeated a bill late Thursday, Dec. 11, that would have provided $14 billion in taxpayer loans to the companies.

Members of Congress and auto executives were meeting all day Friday with White House officials to determine how much money will be released to General Motors (GM) and Chrysler, and on what timetable. Also, the Treasury, sources said, was also working out what oversight rules will be needed as part of the rescue package, and the other conditions the automakers and the auto-workers' union will have to meet. GM and Chrysler are known to be close to reaching their minimum levels of cash needed to sustain their operations.

For weeks, Democratic senators have called on the White House to use some of the $700 billion Wall Street bailout fund to make loans to GM and Chrysler, and to provide a line of credit to Ford (F), which is not in as dire financial shape as its two rivals. But the White House told Congress the fund was not created for industries outside of banks and financial-services companies.

After the auto-rescue bill died in the Senate following weeks of data indicating rising unemployment, however, the White House changed course. Another factor was the further decline in stock prices Friday morning, which analysts attributed to the likely bankruptcy of General Motors and Chrysler.

"Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," said Treasury spokeswoman Brookly McLaughlin.

The Treasury Dept. has about $15 billion of uncommitted funds left from the first $350 billion round of the Troubled Assets Relief Program, or TARP, authorized by Congress. That means it could cover the immediate needs of the auto companies without having to go to Congress. GM has said it needs $4 billion this month to keep paying its bills, and $12 billion total to get through to March.

A Breakdown over Wages?

Senate Minority Leader Mitch McConnell (R-Ky.) and Senator Bob Corker (R-Tenn.) said Thursday night on the Senate floor that negotiations broke down over the United Auto Workers' unwillingness to agree to a date for certain active workers' wages and benefits to be cut to match those of workers at non-union auto factories in the U.S., such as those of Toyota (TM) and Honda (HMC).

Senator Corker, who acted as a broker between the Republican caucus and the UAW and automakers, said Friday: "I feel a sense of surrealness today that we came so close to what would have been a landmark agreement."

Corker said he had asked the UAW to agree to language that would have made labor costs "competitive" with foreign-owned plants, and the definition would have been certified by the next Labor Secretary. Democratic senators would not have supported the language unless the UAW agreed to it.

UAW President Ron Gettelfinger on Friday took issue with the characterization that the talks broke down because of wages. "The wages discussions were about politics in the Republican caucus," said the union leader. Gettelfinger said he didn't want to get pinned down to specific language in the bill over "parity" or "competitiveness" because comparisons between Detroit and foreign automakers are complicated by the benefits held by the vast pool of union retirees.

Even if the union gave in, Corker may not have been able to get the deal passed. There may have been too much opposition no matter what the union was willing to do. "Corker couldn't deliver the Senate even if the UAW agreed," said Rep. Thaddeus McCotter (R-Mich.)

Negotiation Successes

The union, in negotiations with Corker on Thursday, agreed to take half of $21 billion of future health-care and benefit payments owed to it by the automakers in stock rather than cash. And they agreed to negotiate wage "competitiveness" over the next three months. Big investors and banks that hold automakers' bonds also agreed to accept a 70% writedown on the face value of their investments, and to take half of the rest in stock.

The bill language gave authority to a government-appointed "car czar," who would have had to certify the financial "viability" of the automakers by Mar. 31, including wage competitiveness. But Republican senators wanted specific language in the bill to address labor. Gettelfinger said that tactic was designed to "pierce the heart of organized labor."

Corker, despite his freshman status in the Senate, emerged as a major player in negotiations during the past three weeks as he came to favor a government-facilitated restructuring of the automakers instead of having them reorganize under Chapter 11 bankruptcy.

Corker encouraged Treasury Secretary Henry Paulson to adopt as much of the framework of the Senate bill as possible in granting the automakers some of the Wall Street bailout funds. "What we put forth in the bill, and nearly got a deal on, were loan covenants that the Treasury Secretary could adopt by fiat," said the senator.

Details of how Treasury may help the automakers are expected to emerge over the next few days.

The White House and Treasury Dept. said they are likely to help U.S. automakers avert bankruptcy after Republican senators defeated a bill late Thursday, Dec. 11, that would have provided $14 billion in taxpayer loans to the companies.

For weeks, Democratic senators have called on the White House to use some of the $700 billion Wall Street bailout fund to make loans to General Motors (GM) and Chrysler, and to provide a line of credit to Ford (F), which is not in as dire financial shape as its two rivals. But the White House told Congress the fund was not created for industries outside of banks and financial services companies.

After the auto-rescue bill died in the Senate following weeks of data indicating rising unemployment, however, the White House changed course. Another factor was the further decline in stock prices Friday morning, which analysts attributed to the likely bankruptcy of General Motors and Chrysler.

"Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," said Treasury spokeswoman Brookly McLaughlin.

A Breakdown over Wages?

Senate minority leader Mitch McConnell (R-Ky.) and Senator Bob Corker (R-Tenn.) said Thursday night on the Senate floor that negotiations broke down over the United Auto Workers' unwillingness to agree to a date for certain active workers' wages and benefits to be cut to match those of workers at non-union auto factories in the U.S., such as those of Toyota (TM) and Honda (HMC).

Senator Corker, who acted as a broker between the Republican caucus and the UAW and automakers, said Friday: "I feel a sense of surrealness today that we came so close to what would have been a landmark agreement."

Corker said he had asked the UAW to agree to language that would have made labor costs "competitive" with foreign-owned plants, and the definition would have been certified by the next Secretary of Labor. Democratic senators would not have supported the language unless the UAW agreed to it.

UAW President Ron Gettelfinger on Friday took issue with the characterization that the talks broke down because of wages. "The wages discussions were about politics in the Republican caucus," said the union leader. Gettelfinger said he didn't want to get pinned down to specific language in the bill over "parity" or "competiveness" because comparisons between Detroit and foreign automakers are complicated by the benefits held by the vast pool of union retirees.

Negotiation Successes

The union, in negotiations with Corker on Thursday, agreed to take half of $21 billion of future health-care and benefit payments owed to it by the automakers in stock rather than cash. And they agreed to negotiate wage "competitiveness" over the next three months. Big investors and banks that hold automakers' bonds also agreed to accept a 70% writedown on the face value of their investments, and to take half of the rest in stock.

The bill language gave authority to a government-appointed "car czar," who would have had to certify the financial "viabaility" of the automakers by Mar. 31, including wage competitiveness. But Republican senators wanted specific language in the bill to address labor. Gettelfinger said that tactic was designed to "pierce the heart of organized labor."

Corker, despite his freshman status in the Senate, emerged as a major player in negotiations during the past three weeks as he came to favor a government-facilitated restructuring of the automakers instead of a having them reorganize under Chapter 11 bankruptcy.

Corker encouraged Treasury Secretary Henry Paulson to adopt as much of the framework of the Senate bill as possible in granting the automakers some of the Wall Street bailout funds. "What we put forth in the bill, and nearly got a deal on, were loan covenants that the Treasury Secretary could adopt by fiat," said the senator.

Details of how Treasury may help the automakers are expected to emerge over the next few days.

The House may have passed a rescue package for the auto industry, but Senate Republicans could stop it cold.

President-elect Barack Obama yesterday urged President Bush to support immediate aid for struggling automakers and back a new stimulus package, even as congressional Democrats began drafting legislation to give the Detroit automakers quick access to $25 billion by adding them to the Treasury Department's $700 billion economic rescue program.

Bush, speaking privately to Obama during their first Oval Office meeting, repeated his administration's stand that he might support quick action on those bills if Democratic leaders drop their opposition to a Colombia trade agreement that Bush supports, according to people familiar with the discussions.

The discussions raised the stakes for a lame-duck session of Congress that could begin next week and came as fears about General Motors' financial condition yesterday pushed the company's stock price to its lowest level in about 60 years. Obama said last week that passage of the economic stimulus package and help for American car companies are his top priorities. The Bush administration has steadfastly pushed for trade deals before he leaves office.

Congress could consider the auto measure as soon as next week, when lawmakers are scheduled to return to Washington. Yesterday, in an urgent bipartisan appeal, all 15 House members and both senators from Michigan sent a letter asking the Bush administration to include the auto industry in the Treasury program on its own initiative or to work with Congress to modify the program.

"There's an urgent crisis. It's a national issue. If the administration won't act, we'll have to. But they should act," said Rep. Sander M. Levin (D-Mich.).

The entire auto industry is suffering these days, but GM has been particularly hard hit as sales have slowed and credit has tightened. Once the world's largest automaker, the company said yesterday that it was in danger of running out of cash next year. The company is taking a series of steps to conserve cash, including cutting production and laying off 5,500 more factory workers. Yet one closely followed Deutsche Bank analyst cut his forecast on GM's share price to zero, saying that even if GM manages to avert bankruptcy, "we believe that the company's future path is likely to be bankruptcy-like."

The gloomy assessment and others like it helped knock down GM's shares by nearly 23 percent, to $3.36.

So far, administration officials have resisted calls to include the Detroit automakers in the Treasury's bailout program, which was conceived to stabilize banks and other financial institutions reeling from the global credit crisis. Opening the program to the auto industry would expand the government's role in private enterprise far beyond the banking sector, and analysts warn that it could prompt a long line of companies from other industries to show up in Washington with their hands out.

Administration officials have pointed instead to $25 billion in low-interest loans recently approved by Congress as a source of quick help for the car companies. Yesterday, White House press secretary Dana Perino told reporters that the White House would be open to legislation that removes bureaucratic roadblocks slowing the release of that money.

"Congress is going to come back into town next week," Perino said. "If it wants to do anything in addition for the automakers, we'll certainly listen to ideas they have on how to accelerate the loans to viable companies."

Democrats said the loan program is intended to provide long-term assistance to the car companies to retool their factories to produce more fuel-efficient vehicles. They said it was not designed to provide urgent relief from a crisis in consumer confidence that has pushed auto sales to their lowest level in two decades.

"GM has estimated maybe they'd get a billion or two at most next year" from the previously approved loan program, Levin said. "It wouldn't provide for the infusion of capital that's absolutely necessary for them to bridge to the future."

Democrats want the Bush administration to approve an additional $25 billion in loans from the Treasury program, bringing total federal assistance to the car companies to $50 billion. In a letter sent yesterday to Treasury Secretary Henry M. Paulson Jr., Levin and other Michigan lawmakers urged Paulson "in the strongest possible terms to use your authority under the Emergency Economic Stabilization Act (EESA) or other statutes to immediately address a significant and systemic threat to the U.S. economy and provide emergency assistance to the domestic automobile industry."

Given that one of every 10 U.S. jobs depends in some way on the auto industry, the letter says, helping Detroit is "well within the broad mandate of the Treasury Department to promote stable economic growth. Given the urgency of the situation, we ask that you work with us in the coming days to provide immediate loan support to the domestic auto industry, including, if necessary," by amending the emergency stabilization act.

The letter followed a similar entreaty to Paulson over the weekend by House Speaker Nancy Pelosi (D-Calif.) and House Majority Leader Harry M. Reid (D-Nev.).

Amending the Treasury program would require action by both chambers of Congress. As of yesterday, Senate leaders planned to convene Nov. 17, but House leaders had yet to decide whether to summon lawmakers back to work. Although most House members will be in Washington next week to choose the leadership for the next Congress, retiring members and those who lost their seats on election night will not return unless Pelosi calls them back.

House leaders have said they are unlikely to convene the House for legislative business unless the Bush administration agrees to negotiate a spending package to revive the broader economy. As of yesterday, although the two sides continued to talk, there was no deal. But if the Senate approves a $61 billion economic stimulus package that the House passed in September, the House might return to work on that legislation, creating an opportunity to help the automakers.

Michigan lawmakers from both parties said failure to act would be devastating, not only to the car companies but also to the nation.

"Our nation's leaders must not turn a deaf ear toward helping the nation's automakers," Rep. Fred Upton (R-Mich.), co-chairman of the Congressional Auto Caucus, said in a written statement. "We can either stand by and do nothing, watching tens of thousands of jobs in Michigan and Middle America evaporate, or we can meet our challenges head on."

Given the vast sums of money the Bush administration has provided to Wall Street, including a rapidly growing bailout for insurance giant American International Group, Levin said the administration had no excuse not to act.

"How much are we giving AIG? $150 billion? And we're talking about $25 billion for what has been the major industry of this country," Levin said. "If there's a will, there's a way. So now it's up to the administration to respond. If they don't, we'll act."

The Federal Deposit Insurance Corp. and the Treasury Dept. are working on a major program to prevent widespread foreclosures that would include government guarantees of home mortgages.

The plan would use $50 billion from the recently passed bailout package to provide as much as $500 billion to $600 billion in government guarantees on up to 3 million at-risk mortgages. It might require banks and savings and loans to offer loans with lower interest rates for a five-year period, while shifting to the government any risk if the home doesn't recover its full mortgage value within that time.

Without giving details, FDIC Chairman Sheila Bair discussed the program on Oct. 29 at an international deposit insurers' conference in Arlington, Va. She said the agency has developed "a federal program to help more borrowers avoid foreclosure.…Such a framework is needed to modify loans on a scale large enough to have a major impact."

Bair said discussions are ongoing with the Treasury Dept., according to wire reports. The proposal could be out as soon as Oct. 30, says a lobbyist familiar with both elements of the plan and negotiations. However, a Treasury Dept. spokeswoman denied that a proposal is ready. "That is simply inaccurate," said Treasury spokeswoman Jennifer Zuccarelli. "We are looking at a number of proposals on foreclosure prevention, but no one proposal has been decided upon." Details of the plan the FDIC is pushing could change as Treasury—which has authority to administer most facets of the banking bailout—evaluates it. The lobbyist said there may yet prove to be friction with the White House over the plan, as well.

Not Enough?

A mandatory mortgage-relief program would be the government's boldest move on behalf of homeowners since the subprime crisis began picking up steam last year. Bair made a similar proposal six months ago, but it was dismissed without much discussion. Until now, a Bush Administration plan that was voluntary for banks has failed to spur enough loan modifications and prevent foreclosures.

Still, critics say that the five-year loan modification program could be putting off the inevitable for borrowers, and that the $50 billion committed to backing it up may not be enough to put a serious dent in the wave of foreclosures.

According to the lobbyist, the program would require banks, savings and loans, investment funds, hedge funds, and other holders of mortgages to restructure the loans based on a homeowner's ability to pay lower monthly mortgage payments. The government would guarantee a second loan on the home, so banks and other lenders would not lose any money in a mortgage modification. The homeowner would get lower payments for the five years. And if the homeowner defaulted and went into foreclosure anyway, the government would have to make good to whoever had issued the loan.