U.S. moves to support Fannie Mae, Freddie Mac

WASHINGTON -- Treasury Secretary Henry Paulson wants Congress to approve a three-part plan to shore up the huge companies: giving Treasury authority to take an ownership position in the firms if needed; temporarily increasing their existing line of credit at Treasury, currently $2.25 billion; and giving the Fed a role in setting capital requirements and other standards.

Separately, the Fed said it would lend to Fannie and Freddie, if necessary. The central bank has authority to lend to partnerships or corporations that put up U.S. government and federal agency bonds as collateral.

The goal is not to have the government take over the firms, which buy mortgages from lenders and resell them to investors in the form of mortgage-backed securities, but to provide support to let them continue operating as private companies.

Wall Street initially appeared to approve of the plan as stocks jumped in early trading, but the rally faded and turned lower as fears persisted.

"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies," Paulson said in a statement.

The two firms hold or back $5.3 trillion in mortgage debt — roughly half of all U.S. mortgages. Freddie Mac stock has plunged 47% the past 10 days, and Fannie Mae's stock has tumbled 45%.

The move came as Wall Street readies for Freddie Mac's effort Monday to sell $3 billion in short-term notes. A failure to attract bidders would be evidence of the company's weakness and potential gridlock in the financial system. The Treasury has been working on proposals with other regulators for several weeks as the plight of the mortgage giants worsened.

Fannie Mae CEO Daniel Mudd welcomed the initiative, while saying Fannie continues to hold more than adequate capital reserves.