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

Many worries about Fannie and Freddie have centered on their complicated nature. As publicly chartered but shareholder-owned, they have been responsible for both making profit for their investors and helping Americans buy homes. Those worries intensified after the start of the current crisis, when some critics said the firms' desire to satisfy shareholders was trumping their ability to help the government buoy the housing market.

Government officials asserted Sunday that the takeover plan resolved any mismatch of aims in favor of the firms' public mission.

Lockhart said that all lobbying by Fannie and Freddie, which were famous for getting their way in Congress, "will be halted immediately." He said the companies also would be ordered to stop paying more than $2 billion a year in common and preferred stock dividends.

Paulson said that the pair had been operating with a "flawed business model" and that henceforth their chief purpose would be to help the housing market.

"Our economy and our markets will not recover until the bulk of the housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing," he said.

The government replaced Fannie Chief Executive Daniel Mudd with Herbert M. Allison Jr., the former chairman of investment firm TIAA-CREF, and replaced Freddie Chief Executive Richard Syron with David M. Moffett, a senior advisor at Carlyle Group, a private equity firm.

Mudd and Syron are expected to stay on for a transition period.

Paulson said that the firms would expand their portfolios of mortgages and mortgage-backed securities from their current sizes of about $750 billion for Fannie and almost $800 billion for Freddie to $850 billion between now and the end of 2009.

But starting in 2010, Paulson wants the companies to reduce their mortgage holdings by 10% a year until they each hold only about $250 billion.

Instead of choosing to push the firms into a bankruptcy-like receivership, officials chose to allow stockholders to hold on to their shares and profit at least to some degree if the pair ultimately recover.

Any government investment in the companies would involve the purchase of so-called senior preferred stock, which would put Washington first in line among shareholders to get its money back. The Treasury's investments would come with the right to buy up to 80% of the firms for $1 or less a share.