Fed chief says home foreclosures could have spillover effects on broader US economy.
The government supervision plan “is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition” of Fannie and Freddie, he said in a statement.
“Because the [lenders] are in conservatorship, they will no longer be managed with a strategy to maximise common shareholder returns, a strategy which historically encouraged risk-taking.
“Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” he said.
The Treasury and federal housing finance agency will now be able to purchase a new class of preferred stock in the companies to “ensure that each company maintains a positive net worth,” Paulson said.
The strategy means that cash will be injected into the mortgage lenders as needed.
The move will be “more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set,” Paulson said.
The chief executives of Fannie and Freddie have been replaced, officials said on Sunday.
Herb Allison, a former vice-chairman of Merrill Lynch, will run Fannie Mae, while David Moffett, a former vice-chairman of US Bancorp, will now lead Freddie Mac.
The US government has long attempted to support the mortgage lenders since the US housing market ran into trouble last year.
Shares in Fannie and Freddie have lost about 90 per cent of their value amid continued fears of losses due to customers defaulting on their mortgage payments.
About $14bn has been wiped off the two companies after millions of homeowners defaulted or went into arrears.
The federal government’s move to take control of Fannie and Freddie comes two months after George Bush, the US president, approved an act aimed at protecting 400,000 homeowners from foreclosure.
The bill empowered the Treasury to extend credit to Fannie Mae and Freddie Mac if Paulson considered such a move necessary.
But some analysts said a government bail out of Fannie and Freddie could alarm investors concerned at the scale of government intervention.