U.S. Nears Rescue Plan For Fannie And Freddie

If the plan is enacted, it would bring under direct government control two companies that have a long and complicated history as hybrid public and private entities. In July, with the companies reeling from losses and fears growing that they wouldn't be able to raise new cash privately, Paulson gained the power to invest government money in Fannie Mae and Freddie Mac through unlimited loans or stock purchases.

Although the companies' shares initially soared on that news, their financial positions have worsened in recent weeks, along with their ability to raise money in the markets. The companies' shares are off about 90 percent from their highs in the past year.

"It's clear the market wants some closure on this. Any sort of plan that would get the market at ease would be preferred to what we have right now," said Mario De Rose, chief fixed-income strategist at Edward Jones, a brokerage firm based in St. Louis.

In recent weeks, investors less willing to take risks on debt issued by Fannie Mae and Freddie Mac have demanded higher payments, which has increased costs for consumers taking out mortgage loans.

Investor uncertainty over the long-term fate of the companies has left a pall over credit markets. It has been unclear which investors, if any, would suffer should the government intervene to prop up the firms.

The answer, in Paulson's plan, is that holders of preferred shares and subordinated debt, a riskier but higher-paying class of debt, might be made whole. Government leaders were reluctant to allow holders of those assets to incur major losses because they are widely held by banks, and major losses could cause a wave of bank failures.

Placing the companies in conservatorship, rather than receivership, could signal that the government does not intend to nationalize or liquidate Fannie Mae and Freddie Mac. Instead, under the terms of a federal law passed this summer, conservatorship is designed to allow the government to restructure the companies and return them to private control. Treasury officials have previously compared the process to Chapter 11 bankruptcy.

If the government plan succeeds, uncertainty in the markets around Fannie Mae and Freddie Mac could subside, making it easier for the companies to get access to funding at cheaper rates. That, in turn, could have a spillover effect in the overall market for mortgages, lowering interest rates and helping the battered housing market recover.

The move may calm some Asian markets, where central banks and other financial institutions have become among the largest investors in Fannie Mae and Freddie Mac and therefore one of the largest sources of mortgage finance in the United States.

Uncertainty over whether and how Treasury would intervene has caused some major investors to reduce their holdings of the agencies' debt, according to analysts. That threatened to make it more costly for the companies to get financing, increasing mortgage rates and delaying the housing recovery.

Victor Wang, a banking researcher at UBS Securities Asia, said that Chinese banks, the largest foreign holder of agency debt, did not know how to read the possibility of a Treasury intervention. "Very few have full confidence of that," he said. "It's a 'may.' And 'may' means uncertainty. That's something banks don't like."

Staff writers Binyamin Appelbaum, Ariana Eunjung Cha, David Cho, Heather Landy and Lori Montgomery contributed to this article.