WASHINGTON (Reuters) - President-elect Barack Obama's economic team is working to overhaul the $700 billion financial rescue program to stem mortgage foreclosures and spur the flow of credit to the struggling U.S. economy, an Obama aide said on Friday.

The Washington Post reported earlier that Treasury Secretary nominee Timothy Geithner was working with top Obama economic adviser Larry Summers and other aides to hammer out a new approach to managing the Troubled Asset Relief Program, also known as TARP.

The transition official, who spoke on condition of anonymity, confirmed that such an effort was under way and that part of it would likely include using some money to help homeowners avoid foreclosures.

The Obama team is also looking at ways to expand the program to help generate loans to municipalities, small businesses and consumers.

Departing Treasury Secretary Henry Paulson said on Wednesday that Obama, who takes office on January 20, will decide how to spend the remaining half of the $700 billion bailout fund. Paulson has earmarked more than the first $350 billion for investments in financial institutions and loans to struggling U.S. automakers.

The Democratic-led Congress must approve the release of the second $350 billion. Many lawmakers have criticized Paulson's approach to use the bulk of the funds to bolster bank balance sheets -- only to see credit further restricted and some Wall Street firms still paying big bonuses to executives and dividends to shareholders.

Some key Democrats have insisted that aid for struggling homeowners be a part of any request for the remaining funds.

REPORT CRITICIZES TREASURY

The Obama team has not decided when Congress should be asked for the balance of the rescue funds, the Post said.

Under a plan the Obama team is considering, the government would take more stakes in financial firms but companies receiving money would face greater restrictions on executive compensation.

News of the Obama overhaul plan came as a congressional watchdog panel released a report on Friday criticizing the Treasury's handling of TARP, saying it has failed to provide assistance to homeowners, did not reveal its strategy for stabilizing the financial system and did little to track usage of the money.

It cited "significant gaps in Treasury's monitoring of the use of taxpayer money," including asking financial institutions to account for what they have done with taxpayer funds.

The panel's report also questioned whether Treasury has fulfilled Congress' intent in the bailout law that it develop a "plan that seeks to maximize assistance for homeowners."

Geithner is considering creating a new bureau within Treasury to oversee TARP, the Obama aide said. Paulson put one of his advisers, 35-year-old former Goldman Sachs investment banker Neel Kashkari, in charge of administering the fund, naming him assistant secretary for financial stability.

Work on overhauling TARP comes as Geithner is preparing for a Senate confirmation hearing expected to take place next week, probably on January 15.

Senators will be eager to question Geithner on his plans for TARP, among other subjects.

The transition official said overhaul of the bailout program will be a work in progress as the inauguration approaches.

(Reporting by Caren Bohan and David Lawder; Editing by Eric Beech)

www.nytimes.com/reuters/2009/01/09/news/news-us-usa-obama-bailout.html