(Update 1: clarifies remarks made at SIFMA conference) The U.S. Treasury Department will ditch the original purpose of its Troubled Asset Relief Program, or TARP, and will instead look to use Congressionally-approved funds to aid consumer credit and the capital needs of non-banks, according to a bombshell statement by Treasury secretary Henry Paulson on Wednesday morning. The decision not to purchase illiquid mortgage-related securities via TARP is a complete reversal of earlier plans by the Treasury to use $700 billion to clear bad assets off of banks’ balance sheets — but one seemingly welcomed by most market participants. “I will never apologize for changing an approach or strategy when the facts change,” Paulson told reporters in a question-and-answer session after the announcement Wednesday. “Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending,” he said in the announcement. “This is a very complicated area,” he told reporters. “There are no easy answers.” Not a surprise, move makes sense, market participants say The Treasury’s decision not to buy mortgages and mortgage-related assets may disappoint investors and traders in those sectors, but it probably will not come as a huge surprise. Instead, it’s likely to come as a relief, if the discussions presented at the SIFMA’s TARP Summit this past Monday were at all representative of the securities industry’s view. “As Barclay’s head MBS/ABS trader Tom Hamilton put it, ‘Just say what it is,'” said Linda Lowell, a long-time MBS/ABS analyst who attended the summit. “In the meantime he emphasized that TARP had put the market on hold while the bad news on modifications and foreclosures kept on coming in, allowing non-agency paper to slide, a situation deepened by the approach of year-end accounting issues.” More from Lowell: “Panelists and attendees all appeared resigned to the logic behind the Treasury’s shift to direct capital infusions. JPMorgan Securities MD, Fernanco Rivas, first asserted the Treasury gets more “bang for the buck” than by buying assets, but the phrase echoed all day. Another speaker, Randy Guynn, partner at law firm Davis Polk & Wardwell, broached the possibility that Treasury’s delay of asset purchases stemmed from concerns about the mark-to-market effect on bank capital. “He was referring to the inconvenient fact that unrealized losses don’t affect bank earnings or regulatory capital, but selling underwater assets does. Until an asset is written down as other-than-temporarily-impaired, there is a strong disincentive to sell it.” Although mortgage-backed securities are out, for now, Paulson outlined alternative strategies he believes will do the same job of alleviating the pressure of illiquid assets, referring back to the Treasury’s action Monday to further aid American International Group Inc. (AIG). The major strategies Paulson said the Treasury will implement going forward with TARP funds include more capital-building strategies for financial institutions — both at banks and non-banks — as well as increased support for securitizing credit outside the banking system. It’s that second part that will likely draw the most attention from market participants going forward, HW‘s sources suggested. The move to further aid financial institutions might take the form of “matching investments,” to encourage private capital investment and eventually stimulate credit, Paulson said; in English, this means that firms would need to gain private investment in order to access government funds. And while taxpayer protections will be more difficult to achieve in the Treasury’s new-found approach, it’s clear that government officials are now focusing their efforts on stimulating the flow of credit — and cost to the taxpayer appears to be a forgone conclusion. “This [financial mess] is creating a heavy burden on the American people and reducing the number of jobs in our economy,” Paulson said. Paulson said the Treasury is also examining alternative strategies to mitigate mortgage foreclosures and achieve more aggressive mortgage modification standards, now that the plan to purchase illiquid mortgage assets is out of play. Regulators unveiled a ‘streamlined modification process’ yesterday for agency-owned or guaranteed mortgage loans, although FDIC chairman Sheila Bair has been quick to suggest the program doesn’t go far enough; nonetheless, Paulson said that the SMP plan was modeled after the FDIC’s modification program at IndyMac Federal Bank. And although the mod program might require some government spending and is not a perfect plan, he said, it at least shows progress in the effort to stabilize the U.S. housing market. “Maximizing loan modifications, nonetheless, is a key part of working through the housing correction and maintaining the quality of communities across the nation, and we will continue working hard to make progress here,” Paulson said. Read Paulson’s remarks. Write to Diana Golobay at diana.golobay@housingwire.com, and Paul Jackson at paul.jackson@housingwire.com. Disclosure: The authors held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade