The question is whether such a middle course will prove tenable. If Paulson's proposal is received favorably, it could steady the housing and financial markets and give the economy some breathing room. That in turn could help both home buyers and sellers by pushing down mortgage rates and making credit more easily available.
Peter J. Wallison, a Treasury official under President Reagan and perhaps Fannie and Freddie's sharpest critic, has warned that the companies have grown so large that they represent a threatening liability for the government -- one it should try to shed as soon as responsibly possible.
"If there's an injection of capital, that means Treasury will prop up Fannie and Freddie, they'll survive in pretty much their current form and the taxpayers will suffer," said Wallison, an analyst with the conservative American Enterprise Institute.
Taxpayers could suffer most immediately if the housing crisis worsens, the mortgage giants' fortunes deteriorate and the federal investment vaporizes in the process.
Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. (better known as Pimco) in Newport Beach, disagrees. He wants Fannie and Freddie to get huge infusions of federal cash.
"We want to see the money," Gross said. "If Paulson comes out with a few billion dollars, that's nice, but it doesn't do the job. It doesn't speak to Fannie and Freddie being able to keep making mortgages and helping the economy recover."
Between them, Fannie and Freddie own or guarantee more than $5 trillion of U.S. home mortgages, or about half the total outstanding. The mortgage-backed securities that they manufacture have been sold by thousands of banks and investors in the U.S. and around the world.
The two firms have suffered about $14 billion in losses during the last year and could face tremendous additional losses amid a continuing slump in housing prices and the worst bout of home foreclosures since the Great Depression.
In July, the nonpartisan Congressional Budget Office estimated that a government bailout of the pair could cost taxpayers about $25 billion over 10 years. Congress' number-crunching arm also warned that huge uncertainties would surround any bailout. It guessed that the chance was better than even that Washington wouldn't need to spend anything on the firms -- but a 5% chance it would have to pay out more than $100 billion to cover as-yet-unrecognized losses.
