WASHINGTON—Federal lawmakers, frustrated and unhappy, pulled few punches in pummeling Treasury secretary Hank Paulson at a hearing today for what they believe is a failure to use the financial rescue money to benefit homeowners who are in mortgage trouble.

Paulson retreated to lengthy, defensive explanations—and many platitudes—to defend the switch this week in the plan from buying up troubled assets to buying into banks to shore up capital.

Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, demanded to know why billions were used to prevent the collapse of giant insurer American International Group, but little has been done to help homeowners.

He challenged Paulson's assertion that his options were limited by law, and zeroed in on the discrepancy between the billions spent to bail out A.I.G. versus the equivocation on spending for homeowners.

Some $26 billion could be used to alleviate the mortgage crisis—"40 percent of what you invested in A.I.G.," Frank said. "You can find that money, why can't you find $24 billion for mortgage foreclosure?"

"This is in the program," Frank said, referring to the measure Congress passed. "The argument that it isn't does not hold water."

Afterward, Frank told reporters, "It's a mistake not to carve out the $26 billion for mortgages." 

During the hearing, no time was wasted in focusing on Congress's main concern this week—whether to bail out the auto industry. Paul Kanjorski, Democrat of Pennsylvania, complained about the administration's reluctance to fend off "potential collapse of our auto industry."

"Do you consider the loss of the auto industry a systemic risk or don't you?" he pressed Paulson. "If we are going to build confidence, it seems we have to be little more forthcoming."

Paulson conceded, "I don't think it would not be a good thing to have one of the auto companies fail during this time. Any solution needs to meet the long-term stability."
 
This was Paulson's first appearance on a panel with Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., who has differed with Treasury officials over alleviating the mortgage mess.

Bair detailed how the F.D.I.C. was modifying troubled mortgages from failed California bank IndyMac, which is now under the government's control.

"As many as 1.5 million foreclosures" could be avoided by 2009, she testified. This would mean "a half a trillion dollars will remain in consumers' pockets."

But she cautioned there could be as many as five million home foreclosures in the next two years if no action were taken.

Bair's specifics were lauded by several lawmakers, including Maxine Waters, Democrat of California, who "came up with a way to modify loans." She contrasted Bair's actions with Paulson's, noting that "I am very troubled about the direction Secretary Paulson has taken about the $700 billion. It is very clear no matter how the Secretary describes it, we gave him the authority for a foreclosure-mitigation effort."

"You took it upon yourself to absolutely ignore what Congress wanted," she said, lamenting that she lobbied for passage of the rescue bill.

"I am disappointed you haven't utilized the authority, and you have divorced yourself from dealing with that."

That was not the only scolding that Paulson received. As he was beginning to respond to Waters, Frank chastised him loudly, saying "Briefly"—indicating his unhappiness with Paulson's windy responses.

Under the barrage of criticism, Paulson argued, "I think we're on the right track. Remember, we're in early days. The capital has gone out…we're stabilizing the system from any collapse."

But he conceded, "there is still at lot of work that needs to be done for recovery to get capital flowing again."

Even so, Paulson didn't paint an optimistic picture, noting that the economy is changing quickly, and credit markets are still tight. He warned that it would take months for government funds to filter into the markets.

Trying to present a united front, Federal Reserve chairman Ben Bernanke tried to tamp down concerns over policy splits, noting that he "congratulates" the F.D.I.C. on its simple and effective plan. However, he noted that there are different approaches, and warned of the risk of loan modifiers later defaulting and costing the government as much as $100,000 per home.