Officials are desperate to calm nerves ahead of a crucial debt issue by Freddie Mac on Monday and after U.S. bank regulators on Friday seized mortgage lender IndyMac Bancorp in the third-largest bank failure in U.S. history.
A senior Treasury official said all the actions it proposed need congressional approval, but expressed confidence that could be secured this week.
A spokesman for Speaker of the House of Representatives Democrat Nancy Pelosi said she would work with the Republican administration of President George W. Bush on this matter.
Democrats in the Senate also said they stood ready to work with the Administration on quickly addressing the problems faced by the mortgage companies.
Shares in the two mortgage giants have been hammered by concerns that they might run out of capital amid mounting home-loan losses.
WEIGHT ON ECONOMY
Housing woes have forced the Fed to slash benchmark interest rates since September and open its discount window to investment banks for the first time since the Great Depression some 80 years ago.
Fannie and Freddie buy mortgages from lenders and package them into guaranteed securities, providing more funds to keep mortgage markets lubricated.
They also borrow regularly on capital markets to fund their operations and one investor predicted Freddie's planned auction of $3 billion in 3- and 6-month notes on Monday would go well.
Dan Fuss, vice chairman of Boston-based Loomis Sayles, which oversees more than $100 billion in fixed-income securities, also said he had been buying Fannie and Freddie paper in recent days because it was "outstanding value".
Freddie and Fannie debt rallied sharply on Friday as investors bet they would get closer government backing and analysts said that this was in fact happening.
"Fannie Mae and Freddie Mac have never been more related to the U.S. government," said Margaret Kerins, U.S. agency strategist at RBS Greenwich Capital in Chicago.
But Fannie and Freddie's shares have been savaged in recent days and reduced to a fraction of their value a year ago and analysts remain sceptical.
The two companies play a vital role in U.S. housing markets, which already are experiencing their deepest downturn since the Great Depression, and Treasury and the Fed are on the spot to make sure they do not put a sorely stressed financial system in worse shape than it is already in.
Many fear that were they to fail it would unhinge already battered world financial markets and inflict a deep recession in the United States that would chill growth everywhere.
Treasury said its temporary increase in the line of credit that the GSEs now have with Treasury, would be up to an amount to be determined by Paulson. The current credit line for each lender is $2.25 billion.
In addition, "to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed," Paulson said.
