WASHINGTON — Acting to prevent a severe disruption of the mortgage market, the federal government stepped in Sunday with plans for a sweeping aid package designed to bolster confidence in battered home-loan giants Fannie Mae and Freddie Mac.
The Bush administration said it would ask Congress to authorize the Treasury Department to lend Fannie and Freddie more money than current limits permit and buy stock in the two companies.
Also Sunday, the Federal Reserve agreed to permit the companies to borrow directly from the central bank, as investment firms were allowed to do after the near-collapse of Bear Stearns Cos. in March. The money would tide Fannie and Freddie over while the administration and Congress rush the emergency measures through.
Both the companies and the government said they did not fear a collapse but that assurances were needed to soothe Wall Street, where the companies' shares lost nearly half their value last week.
"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," Treasury Secretary Henry M. Paulson Jr. said in disclosing the administration's plan. "Their support for the housing market is particularly important as we work through the current housing correction."
The two own or guarantee nearly half of the nation's $12 trillion in mortgage debt, and the new proposals would allow them to borrow billions of dollars, both to shore up their finances and to expand.
"This is basically a safety net," said Assistant Treasury Secretary Michelle Davis. "We do not expect to need to execute on either [the increased Treasury lending or the government stock purchase] immediately."
The government stopped short of an outright takeover of the two companies, which have suffered billions of dollars in losses as rising numbers of Americans default on their mortgages.
Nevertheless, the plan amounted to a blunt acknowledgment that what began as a stock-market sell-off by jittery investors had grown in intensity and begun to threaten the functioning of the mortgage market and health of the broader U.S. economy.
"It is very dramatic and historic," said Ed Grebeck, chief executive of Tempus Advisors, a debt-strategy firm in Stamford, Conn. "The government must have felt it had no choice because of the situation in the residential property market combined with mortgage defaults of an unprecedented nature."
