Oct. 7 (Bloomberg) -- John McCain said he would order the Treasury Department to buy up bad mortgages in the U.S. and allow homeowners to renegotiate, as he and rival Barack Obama clashed over their economic proposals and records.

``I would order the secretary of Treasury to immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes,'' McCain said tonight during their second debate, a town hall-style forum at Belmont University in Nashville, Tennessee.

Versions of the mortgage proposal have been floated previously by the Republican nominee and others as Congress debated a $700 billion plan to rescue financial markets. ``Is it expensive? Yes,'' McCain said. ``But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy.''

The two candidates stuck to familiar positions in answering questions from audience members, with Obama blaming President George W. Bush's policies for the current financial crisis and McCain pushing for lower taxes and less government spending. McCain repeatedly attacked Obama's record, saying the Democrat would raise taxes and has never bucked his party's leadership.

``Let's look at our record,'' McCain said. ``I've fought higher taxes. I've fought excess spending. I've fought to reform our government.''

Fighting Back

Obama responded by saying McCain has been in Washington for 26 years and hasn't been able to bring about changes in government to improve the lives of Americans. ``It's easy to talk about this stuff during a campaign,'' Obama said.

The face-off comes as McCain is dropping in national and state polls. Worries about the economy have bolstered Obama's standing with voters. McCain has often had an advantage in surveys when Americans are asked who can best handle national security issues.

Some of the most forceful moments for Obama came when he was challenging McCain on foreign policy, particularly on what he called McCain's ``cheerleading'' for the war in Iraq. Obama said that McCain's stance on Iraq would keep the U.S. mired in a conflict that's draining the U.S. of crucial economic and military resources.

``It was the wrong judgment,'' Obama said, adding later that ``there has never been a nation in the history of the world that saw its economy decline and maintain its military superiority.''

McCain in turn accused Obama of wanting to bring home U.S. troops ``in defeat'' by setting a timeline for withdrawal.

Early Offensive

McCain went on the offensive early, in an answer to the second question about how the government plan to rescue Wall Street would help regular taxpayers.

He blamed ``Senator Obama and his cronies'' for encouraging Fannie Mae and Freddie Mac to jump into the subprime-mortgage market while taking campaign contributions from the two mortgage giants.

``One of the real catalysts, really the match that lit this fire, was Fannie Mae and Freddie Mac,'' McCain said.

Obama said the rescue package would free up credit markets to help businesses pay employers and suppliers.

``Now, I've got to correct a little bit of Senator McCain's history, not surprisingly,'' Obama said in response to McCain's attack. He cited McCain's past support for lessening government regulations and noted reports that a firm owned by McCain's campaign manager, Rick Davis, did lobbying work on behalf of Freddie Mac.

Praise for Buffett

Both candidates lauded billionaire investor Warren Buffett when asked who they would choose as Treasury secretary.

``Warren would be a pretty good choice,'' Obama said, after McCain raised Buffett's name and that of former EBay Chief Executive Officer Meg Whitman. Buffett supports Obama, while Whitman is backing McCain in the presidential race.

Before tonight, experts said the town-hall format would benefit McCain, 72. The Arizona senator has made such events a staple of his campaign through the primaries and into the general election season. Audience members could bring up any issue.

Americans judged Obama, 47, an Illinois senator, as the winner of the first debate, held on Sept. 26, according to polls. Neither made a huge gaffe or scored enough points to make a big difference in the race, analysts said afterward.

Campaign Attacks

The two met face-to-face tonight as the campaign over the past several days has grown increasingly heated and personal.

Alaska Governor Sarah Palin has criticized Obama for his association with William Ayers, a former member of the Weather Underground radical group. She said Obama is someone who would ``pal around with terrorists who targeted their own country.'' Obama once served on a charity board with Ayers, and has denounced the bombings by the Weather Underground, which took place when Obama was a child.

Obama's campaign responded by launching a Web site about McCain's relationship with former savings-and-loan executive Charles Keating during the 1980s S&L collapse, looking to draw comparisons between today's market upheaval and McCain's role in the S&L scandal.

To contact the reporters on this story: Kristin Jensen in Washington at kjensen@bloomberg.net; Catherine Dodge in Washington at cdodge1@bloomberg.net

Last Updated: October 7, 2008 22:57 EDT