NEW YORK (MarketWatch) -- With financial markets still not working smoothly two months after almost shutting down, the Federal Reserve unveiled further steps Tuesday aimed at lowering borrowing costs for consumers and home buyers.

The Fed has pumped billions of dollars into financial institutions, but found that this was not enough to bring institutional buyers and sellers of key mortgage and lending products back to the market.

The central bank announced what it called a term asset-backed securities loan facility, a plan under which it will lend up to $200 billion to support the issuance of debt backed by consumer and small-business debt -- such as credit-card loans, student debt, auto loans and loans backed by the Small Business Administration.

In addition, the Fed said that it would purchase up to $100 billion in direct debt of Fannie Mae FNM, , Freddie Mac FRE, -0.59% and the Federal Home Loan Banks, along with up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae (the government-sponsored enterprises, also known as GSEs).

The Treasury Department is providing a backstop for the asset-backed-securities program from its Troubled Asset Relief Program pool, known as TARP.

“ The Fed 'is well on its way of following the Bank of Japan's policy of quantitative easing -- targeting the quantity of money rather than its price.' ” — Ashraf Laidi, CMC Markets

"The financial markets are not working as we'd like them to work ... and this is an effort to address that situation," said Treasury Secretary Henry Paulson.

In an illustration of the problem, delinquencies and losses on U.S. prime auto asset-backed securities remained at their highest levels since 2000, pressured by seasonal factors along with the current economic climate, according to Fitch Ratings.

In another example of the trouble that lenders have been having, credit-card giant American Express Co. AXP, -1.08% earlier this month -- on the same day that Paulson said the Fed's latest plan was on the way -- sought government help to steer it through the financial crisis, and Capital One Financial Corp. COF, -1.23% received preliminary approval for $3.55 billion in U.S. investment. See full story.

Bypassing banks, creating liquidity

In general terms, economists welcomed the Fed's latest actions, although some critics complained it doesn't make sense to encourage Americans to borrow more.

The U.S. central bank hopes the plan to lend to the markets for asset-backed-securities will create liquidity, which in turn would encourage originators of consumer loans to restart lending to individuals.

The markets for asset-backed securities "historically have funded a substantial share of consumer credit and SBA-guaranteed small-business loans," the Fed said in a statement detailing the new loan facility.

The facility is designed to generate increased credit availability and to support economic activity by facilitating renewed issuance of consumer and small-business asset-backed securities at what the Fed called "more normal interest-rate spreads."

On Nov. 12, Paulson laid out some details for the next stage of the government's financial-market rescue package. He announced that the Treasury had shelved the original plan to buy troubled mortgage assets while turning its attention to nonbank financial institutions and consumer finance.

Some of the money saved from not buying mortgage assets would be used to shore up the market for credit-card receivables, auto loans and student loans, according to Paulson. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt," he said. See full story.

U.S. government officials said the new asset-backed securities program is designed to go around banks and to reach cash-strapped investors. It's set to be up and running in February.

The Treasury will provide $20 billion of credit protection to the Fed in connection with the asset-backed securities loan.

Investors will be able to tap the Fed for funds to purchase these asset-backed securities. The Treasury's thinking is that this will remove some of the fear in the market and let investors become more engaged, according to government officials.

Purchases of up to $100 billion of GSE direct obligations will be conducted through primary dealers in a series of competitive auctions to begin next week.

The open-market purchases will be conducted by asset managers selected via a competitive process with a goal of starting the program before the end of the year.

Thawing out the mortgage market

Lauding the new program, Paulson said the government may act to expand it over time to include other assets, such as commercial mortgage-backed securities, nonagency residential mortgage-backed securities and other asset classes.

For now, government officials said they hope that direct purchase of mortgages would lower yields on the loans for home buyers.

"This action is being taken to reduce the cost and availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the Fed said.

Already, the yield on current-coupon mortgages has fallen 60 basis points, or 0.6%, from Friday's close, according to Morgan Stanley analysts.

Those gains will help a different benchmark for investors. Yields on mortgage-backed securities on Monday were about 1.64 percentage points higher than Treasurys, according to an index compiled by Merrill Lynch. That's headed back up towards the multi-year highs reaching in March and is contributing to keeping mortgage loan rates high, and therefore less available or desirable for potential home buyers.

Fresh data reported Tuesday in the latest S&P/Case-Shiller analysis of home prices showed continued deterioration, underscoring the extent of the problem in U.S. real estate. See full story.

Ashraf Laidi, chief foreign-exchange strategist at CMC Markets, said the Fed "is well on its way of following the Bank of Japan's policy of quantitative easing -- targeting the quantity of money rather than its price."

However, government officials denied the program was quantitative easing, noting that the Japanese central bank added reserves to influence bank behavior. By contrast, the U.S. program's aimed at investors, the officials commented.

The Fed will be adding reserves to its balance sheet, which has already grown by $1.3 trillion this year as a result of the program.