March 13 (Bloomberg) -- Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben S. Bernanke and other U.S. regulators today will propose greater scrutiny of lending in a report on lessons from the mortgage crisis.

``Regulators have a role to play in every change,'' Paulson said in excerpts released by Treasury of a speech he will make at 10 a.m. in Washington on a report by the President's Working Group on Financial Markets. ``They will issue new rules and seek regulatory authorities as needed, evaluate progress, provide guidance and enforce laws, to ensure that implementation follows recommendation.''

Policy makers have said they aim to address deficiencies in how lenders wrote mortgages, then packaged them into bonds rated by credit ratings firms and sold by securities companies. Consumer advocates and legislators argue that the system failed to ensure that borrowers could repay the loans, and helped deepen a slump that has led to record foreclosures.

``Regulation needs to catch up with innovation and help restore investor confidence, but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it,'' Paulson said.

The Treasury chief said the report will include proposals to strengthen supervision of banks' capital, amid concern they failed to protect against the risks they took investing in subprime assets.

``We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies,'' Paulson said. ``We need these institutions to continue to lend and facilitate economic growth.

Banks and securities firms posted more than $188 billion of credit losses since the start of last year as the mortgage meltdown rippled through financial markets. As lenders made it tougher to get loans and home values slid, delinquencies climbed.

Casting Blame

Blame for the debacle will be spread among federal supervisors, ratings companies and large banks and securities companies, a government official said, speaking on condition of anonymity. Consumer advocates and congressional Democrats have criticized regulators for failing to halt abusive lending practices during the 2004 to 2006 mortgage boom that has now turned to bust.

``Regulators should have been more attentive'' when ``brokers were getting people who couldn't afford it to buy mortgages, and when lenders were funding such loans and pooling them without appropriate analysis,'' said Michael Barr, a Treasury official in the Clinton administration, and now a professor at the University of Michigan Law School at Ann Arbor.

The central bank already aims to tighten regulation of mortgage lending, proposing in December to ban subprime loans that lack income documentation and to eliminate most prepayment penalties. Bernanke has also backed tougher oversight of mortgage brokers.

Credit Ratings

The SEC in February said it may propose new rules for credit-rating companies, increasing disclosure about how past ratings fared.

The President's Working Group is chaired by Paulson and includes Bernanke, Securities and Exchange Commission Chairman Christopher Cox and Walter Lukken, acting chairman of the Commodity Futures Trading Commission.

Fed spokesman David Skidmore declined to comment, as did Treasury spokeswoman Brookly McLaughlin, SEC spokesman John Nester and Dennis Holden at the CFTC.

$1.2 Trillion

Investment banks including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc. sold $1.2 trillion of subprime mortgage securities in 2005 and 2006, according to estimates by Brian Bethune, director of financial economics at Global Insight Inc. in Waltham, Massachusetts. Standard & Poor's, Moody's Investors Service and Fitch Ratings often gave the assets top AAA ratings.

The working group will echo a report by U.S. and European regulators last week, the official said. That release said supervisors are ``ensuring that firms are making appropriate changes'' in their risk management.

Paulson's report comes amid a crisis of confidence in mortgage securities, as investors question the validity of even the highest-rated assets. Premiums on home-loan debt guaranteed by Fannie Mae and Freddie Mac, the biggest sources of American home financing, climbed to a 22-year high this month.

The Treasury chief is also battling to keep the economy from descending into a deeper downturn. Employers cut workers at the fastest pace in five years in February, government data show.

`Weakest Quarter'

``I'm convinced that we're in the weakest quarter that we're going to see for a while,'' Edward Lazear, head of the White House Council of Economic Advisers, said in a Bloomberg Radio interview yesterday.

Paulson and Bernanke have repeatedly urged banks to increase capital. UBS AG analysts project that credit losses may top $600 billion.

Bear Stearns, the second-biggest underwriter of mortgage bonds, has slid 12 percent this week on concern the New York- based company lacks sufficient cash. Chief Executive Officer Alan Schwartz denied the rumors.

Companies including American International Group Inc. are pushing for accounting changes on valuing subprime-mortgage assets. The firms complain that valuation of assets not readily bought or sold forces them to book losses they don't expect to incur.

AIG, which wrote down more than $11 billion last month from derivatives linked to subprime loans, said it expects the ``unrealized'' losses to reverse over time.

``Lots of folks are recognizing that accounting rules are not perfect,'' said Wayne Abernathy, an executive director at the American Bankers Association in Washington. ``Depending on what'' Paulson ``wants to do, it could be very positive,'' he said.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: March 13, 2008 09:04 EDT