US Steps in to Rescue Failing Home Loan Giants

The United States government last night announced the biggest financial bailout in the country's history, as it took the troubled American mortgage giants Freddie Mac and Fannie Mae into temporary public ownership to save them from collapse.

In one of the most dramatic turns in the year-old credit crunch, the treasury secretary, Henry Paulson, said that the Federal Housing Finance Agency, formerly the regulator of the two companies, would run both businesses. Their current management has been replaced and further funds would be made available, he said.

Fannie and Freddie account for half of all mortgages in the US. During the last year they have struggled to remain solvent, after bearing the brunt of the sub-prime crisis. The wider housing market was hit and hundreds of thousands of homeowners were forced to hand back the keys to their homes.

Paulson, who had previously battled to prevent the Northern Rock-style government takeover of the lenders, said the world faced a severe setback in its attempts to deal with the credit crunch if the two institutions were allowed to fail.

He said: "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. This turmoil would directly and negatively impact household wealth."

Paulson had briefed the US presidential candidates Barack Obama and John McCain at the weekend about the plan. McCain gave it his backing, but Obama said he would reserve judgment. "We have to protect taxpayers and not bail out shareholders and management," he said.

The plan received the full support of the Federal Reserve chairman, Ben Bernanke. Freddie and Fannie have lent or underwritten about £2.7 trn of the total £6 trn of outstanding mortgage debt in the US. But the collapse in the housing market and surge in mortgage defaults meant the two groups racked up a combined $14bn of losses during the past year.