A top House Democrat confirmed Saturday that the government is planning to intervene to stabilize troubled mortgage finance companies Fannie Mae and Freddie Mac.
Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, said in a statement that Treasury Secretary Henry Paulson "intends to use the powers that Congress provided it" in a law passed in July to enable Fannie Mae and Freddie Mac to keep functioning.
But Frank, who spoke with Paulson late Friday, said he did not "know the details of the proposed interventions," and a Treasury spokeswoman declined to comment.
A person briefed on the matter Friday said the government was planning to take over both companies, which together hold or back half of the nation's mortgage debt.
The intervention, which could cost taxpayers billions, was expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the companies into a conservatorship as early as this weekend.
Fannie Mae and Freddie Mac have lost a combined $14 billion over the past four quarters as a record number of Americans fell behind on their mortgages and went into foreclosure. While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.
In July, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the companies if needed. Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.
The Bush administration, however, may have little choice but to support Fannie and Freddie.
Their role in the U.S. mortgage market has grown dramatically over the past year as other lenders collapsed under the weight of bad subprime loans. The companies guaranteed about three-quarters of all new mortgages in the second quarter of this year, up from under 40 percent in 2006, according to the trade publication Inside Mortgage Finance.
Fannie Mae was created by the government in 1938, and was turned into a public company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.
A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.