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WASHINGTON (Reuters) - Fannie Mae and Freddie Mac said on Friday that their finances were sufficiently sound to withstand the housing crisis as government officials scrambled to restore confidence in the country's two largest mortgage finance companies.
U.S. Treasury Secretary Henry Paulson indicated that a bailout of Fannie and Freddie was unlikely despite financial market concerns that the agencies, which finance nearly half of U.S. homes, may have trouble raising enough money to keep buying mortgages.
A key senator said the U.S. Federal Reserve was considering allowing Fannie and Freddie to borrow directly from the central bank, spurring speculation that the Fed may take action as early as this weekend. Fannie and Freddie shares, after taking a beating, recovered some of their earlier losses but ending lower on the day.
Sen. Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, said he spoke with Fed Chairman Ben Bernanke and Paulson. Dodd said they were looking at various options, including opening access to the discount window, through which the Fed acts as a lender of last resort for the U.S. banking system.
Investors were worried that the mortgage agencies might run short of capital, placing the fragile U.S. economy at even greater risk and deepening the housing slump. Dodd sought to reassure investors about the health of the two companies.
"These institutions are fundamentally sound and strong," Dodd said at a news conference. "There is no reason for the kind of (stock market) reaction we're getting."
Concerns about Fannie and Freddie were stoked by a report in The New York Times on Friday saying the administration was considering a plan to put the companies -- thought to have implicit government backing -- into a conservatorship if their problems worsened, citing sources briefed about the plan.
In a conservatorship, regulators appoint a person or entity to run a troubled financial institution until it can be stabilized.
Freddie Mac said in a statement it had options to manage capital, such as cutting its dividend, and was not on the threshold of conservatorship. Fannie said it had access to "ample sources of liquidity," noting that it had issued more than $24 billion in debt this week.
Were Fannie and Freddie unable to borrow or find it too costly, they would not be able to buy mortgages from lenders. This would make it far more difficult, and perhaps impossible, for people to obtain home loans, which could cause the housing market to grind to a halt. Borrowing from the Fed would give the agencies quick access to inexpensive funds.
Fed spokeswoman Michelle Smith said the central bank was monitoring the situation closely, but had had no discussion with Fannie or Freddie about accessing the discount window.
Paulson earlier said the primary focus was supporting Fannie and Freddie "in their current form as they carry out their important mission."
The reference to keeping Fannie and Freddie in their current form was a signal the government was not on the verge of nationalizing them, and that it wanted to see them survive as congressionally chartered but privately-held companies, a source familiar with the administration's thinking said.
Separately, the Senate passed a housing bill on Friday that included regulatory reform of agencies including Fannie and Freddie, known as government-sponsored enterprises or GSEs. It now moves to the House of Representatives, which has approved a similar measure. The White House has threatened a veto.
James Lockhart, director of the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, welcomed the bill as a way to shore up confidence.
"This bill should help restore confidence in the housing markets by creating ... a new, stronger regulator with all the necessary tools to oversee Fannie Mae, Freddie Mac and the Federal Home Loan Banks," he said in a statement.
A former Fed policy-maker said on Friday that it was crucial that the government bolster Fannie and Freddie and their huge assets.
"It would produce a worldwide financial crisis of unspeakable magnitude if they were allowed to default," said former St. Louis Federal Reserve president William Poole.
Fannie shares closed at $10.25, down some 22 percent, but well above the session low of $6.68. Freddie closed at $7.75, down 3.1 percent, after touching a low of $3.89 earlier in the session. Both have lost close to 90 percent of their value since August. The companies' bonds, however, posted gains.
Bondholders theoretically would have priority in any insolvency.
Fannie and Freddie own or guarantee $5 trillion of debt, close to half of all U.S. mortgages. They have been hit hard by the nation's housing crisis, suffering billions of dollars of losses and higher borrowing costs as many investors lose confidence they can raise sufficient capital to stay afloat.
Since the crisis began, Fannie and Freddie have lost more than $11 billion, and raised some $20 billion of capital.
Some on Wall Street speculated the Fed might announce some sort of action this weekend, much like it did in March when Bear Stearns was on the brink of bankruptcy and the central bank stepped in on a Sunday to orchestrate its sale to JPMorgan.
Apart from the idea of opening the discount window, another possibility might be increasing their credit lines from the Treasury, currently at $2.25 billion each.
(For the New York Times report online, click on: here =&oref=slogin&pagewanted=print)
Additional reporting by Matt Spetalnick in Washington; Jennifer Ablan, Anastasija Johnson and Al Yoon in New York; Kevin Plumberg and Parvathy Ullatil in Hong Kong; Gerrard Raven in London; Geraldine Chua in Sydney, and Eric Burroughs in Tokyo; Writing by Emily Kaiser and Jon Stempel; Editing by Chizu Nomiyama, Gary Crosse