WASHINGTON — The Treasury Department is asking lawmakers for broad authority to purchase and hold up to $700 billion worth of illiquid mortgage assets.

In draft legislative language sent to Capitol Hill, which was obtained by American Banker, Treasury is asking for power to buy — and later sell — any residential or commercial mortgage asset originated before Sept. 17.

Under Treasury's bill, it would also have the power to enter into contracts, designate financial institutions as agents of the government, establish vehicles to purchase mortgage-related assets, and issue any regulations necessary to carry out its authority.

The draft bill would give the Treasury the authority to manage its portfolio of assets, including revenues and portfolio risk, and sell or enter into repurchase contracts.

Under the draft bill, Treasury would be required to report to Congress on the use of its authority within three months.

Treasury sent its bill to Congressional leaders late Friday night, sources said, and lawmakers will now begin the process of refining it, potentially adding or changing provisions.

As drafted, Treasury could use its power to buy far more than $700 billion worth of mortgage assets over time. The draft language only restricts Treasury to holding no more than $700 billion of mortgage related assets "at any one time." If it sold some assets back to the private sector, even at a loss, it could continue to purchase more, observers said. That could continue to drive up the potential cost of the plan to taxpayers.

"The authority is broad and the $700 billion represents the total amount at any one time but there is not a cap on the total amount of assets that can be purchased," said Scott Talbott, senior vice president for government relations at the Financial Services Roundtable. "It’s a revolving line of credit."

Under the draft bill, Treausry's authority would sunset in two years. The agency said only U.S. financial institutions headquartered here could participate, but it did not specifically define what types of companies — other than commercial and investment banks — would fall into the category of financial institution.

Democrats are likely to seek changes to the draft language. For example, Democratic lawmakers may seek to require modifications on all mortgage loans purchased by the government. Other problems could also arise, observers said.

"There are going to be some hiccups of this plan because it’s completely open ended — Wall Street runs this plan and there’s no help for homeowners," said Howard Glaser, a mortgage consultant. "Congress will find it very troubling that the asset managers running this program will be asset managers hired by Treasury."

Lawmakers were being briefed on the plan Saturday. Sen. Charles Schumer, D-N.Y., one of the first to react, said he supported Treasury's draft, but would seek changes.

"This is a good foundation of a plan that can stabilize markets quickly," he said in a press release. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."

It is not clear if Republicans will go along. Republican leadership pledged to work with Mr. Paulson and Democrats on the bill late Thursday but several lawmakers were already expressing concerns the next day that the plan goes too far. Sen. Richard Shelby, R-Ala., the top GOP member of the Senate Banking Committee, has said he is skeptical of the plan, but has not ruled out supporting it. Sen. Jim Bunning, R-Ky., a member of the Senate Banking Committee, said in a press release that the "free market is dead."

Mr. Paulson announced his intention to seek the authority at a news conference on Friday. He did not offer any details but said buying up illiquid assets is the only way to stablize the housing market.

"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," Mr. Paulson said. "This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible."

The announcement came after Mr. Paulson, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Chris Cox met with lawmakers on Thursday night. Lawmakers said they were alarmed by what they heard.

"I gulped when I heard Bernanke's description of what could happen if we didn't act," said Sen. Charles Schumer, D-N.Y.

Lawmakers are hoping to begin debate on the bill on Tuesday.

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