U.S. seizes mortgage titans in multibillion-dollar rescue

In perhaps the most unexpected aspect of its rescue effort, the government said that the Treasury would start buying up an undetermined quantity of the mortgage-backed securities issued by the troubled firms. And it will even permit Fannie and Freddie to temporarily ratchet up their own buying of such securities in an effort to expand the funds available for mortgages and drive down the interest rates that home buyers must pay.

Despite dramatic rate cuts by the Federal Reserve over the last year, the rate for a standard 30-year fixed-rate mortgage has remained stubbornly above 6%.

Many policy analysts had hoped the rescue would set the stage for Washington to finally divest itself of the firms and, with them, the expensive responsibility of riding to their rescue in the future. These critics complained that the takeover's structure all but assured the opposite.

"The effect will be to keep the companies alive and in government hands," said Peter J. Wallison, a former Reagan administration Treasury official who has been the firms' sharpest critic. "I just don't understand why anybody would do this."

On the other hand, longtime congressional supporters of Fannie and Freddie were surprised by Treasury's call for the firms to shrink their operations dramatically after briefly expanding them. They pledged to fight the move.

"There is no basis for that," said Rep. Barney Frank (D-Mass.), the influential chairman of the House Financial Services Committee. "This thing is not at all binding, and we'll debate that," he said of the Treasury's cutback order.

Paulson and James B. Lockhart, director of the Federal Housing Finance Agency, would not say what spurred the government to act now.

Both refused to comment on reports that investment advisors hired by Treasury had uncovered accounting irregularities at Freddie Mac that inflated the amount the company had set aside as a financial cushion in case of trouble.

But the Federal Housing Finance Agency is scheduled to issue a report this month that is widely expected to show the firms have sustained huge new losses and that one or both may be insolvent by some measures. The two already have reported losing $14.9 billion over the last year.

"I have determined the companies cannot continue to operate safely and soundly and fulfill their critical public mission . . . in supporting the residential mortgage market in this country," Lockhart said.