The US government seized control of Fannie Mae and Freddie Mac Sunday, seeking to deflect the rising threat of surging mortgage defaults that were poised to topple the two companies that manage about half of the US home loan market.
"It is necessary to take action," Treasury Secretary Henry Paulson said. "Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner."
Paulson engineered the takeover along with Federal Housing Finance Agency (FHFA) Director James Lockhart.
The FHFA is taking over Fannie and Freddie under a so-called conservatorship and replacing their chief executives and eliminating their dividends.
The Treasury is to purchase up to $100 billion of senior-preferred stock in each company.
Federal Reserve head Ben Bernanke said in a statement that he "strongly" endorsed the move.
"These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," he said.
The move appeared to be based on a law passed by the US Congress in early August which also shored up other aspects of the faltering mortgage market that has been undermined by record foreclosures.
Fannie and Freddie have suffered $14.9 billion in losses from the widening mortgage foreclosure crisis in the US that has rippled outward to foreign investors. The central banks of many countries, including those in Asia, hold considerable stock in Fannie and Freddie.
The Treasury has briefed Democratic presidential candidate Barack Obama and was in touch with the staff of Republican candidate John McCain over the weekend about the takeover.
In August, Fannie Mae reported a second quarter loss of $2.3 billion, marking a fourth straight quarter of losses. The company recorded a $1.86-billion gain in the same period a year ago.
Fannie and Freddie together manage nearly half of the $12 trillion US mortgage market. The two are chartered by the federal government but have publicly traded shares.
The number of new mortgage holders entering foreclosure in the second quarter stood at 1.19 percent of all US mortgages, the Mortgage Bankers Association said Friday, the first time the rate has topped one percent in the 29-year-history of the association's record keeping.
Last month's new law approved an emergency plan for the twin lenders. At the time, government officials warned that their collapse could plunge the US into a far deeper crisis.
The bill passed in August also allowed up to 400,000 mortgage-holders to refinance into low-interest government loans - effectively guaranteeing $300 billion worth of new mortgages.