Paulson Engineers U.S. Government Takeover of Fannie, Freddie (Dawn Kopecki and John Brinsley)

Created by : Francis Goodwin View profile

Sept. 7 (Bloomberg) -- The U.S. government will take control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to bring down the companies making up almost half the U.S. home-loan market.

``We have determined that it is necessary to take action,'' Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in a statement today. ``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 on housing.''

The takeover of Fannie and Freddie is the biggest step yet in officials' efforts to grapple with a yearlong credit crisis that has caused more than $500 billion of losses and writedowns. The government is taking an increasing role in financial markets, after the Federal Reserve six months ago provided $29 billion of financing to prevent Bear Stearns & Cos.'s collapse.

Lockhart said his agency has placed Fannie Mae and Freddie Mac into conservatorship. This was because the companies ``cannot continue to operate safely and soundly and fulfill their critical public mission without significant action to address our concerns,'' he said in a statement.