(By Salman - iStockAnalyst Writer)Late Friday evening, news began to pour out that Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae (FNM) and Freddie Mac (FRE) under government control, seeking to halt the crisis of confidence in the companies that control almost half the U.S. mortgage market. Together, the two government-sponsored companies have seen a combined $3.1-billion loss from April to June. In past four quarters Fannie and Freddie have reported $14.9 billion in net losses as loan delinquencies rose. The losses stems from the general rise in home foreclosures compounded by the decline in securities made up of subprime mortgages. The collapse of subprime-backed securities has already forced the world's biggest banks to write off more than $200 billion over the past 12 months.

Fannie Mae is the nickname for the Federal National Mortgage Association while Federal Home Mortgage Corporation is also better known as Freddie Mac. Fannie Mae was established in 1938 by the federal government to expand the flow of mortgage funds across the nation and to help lower the costs to buy a home. Thirty years later, it was reconstituted by Congress as a shareholder-owned company. Freddie was created in 1970 to prevent monopolization of the secondary mortgage market by Fannie. Collectively, they are know as GSEs or Government Sponsored Enterprises and their job is to provide local banks and mortgage lenders with liquidity to finance home mortgages. These GSEs are not government owned, only government sponsored which implies that they are privately held and operated by shareholders but receive a line of credit from the US Treasury and an exemption from taxes. Fannie was privatized by Lyndon B. Johnson in 1968 to remove it from the national budget. Both GSEs are exempt from SEC oversight. They guarantee approximately $ 6 trillion in outstanding home loans, and service 50 million mortgage customers. The value of their loans is equal to as much as 2/3 of the current national debt. Unlike the other Fortune 500 companies, Fannie and Freddie are not forced to disclose their financial difficulties.

Recently, Freddie Mac declared a loss of $821 million for the second quarter, slashed its quarterly dividend and promised investors that it would raise at least $5.5 billion in new capital. The magnitude of the loss was five times worse than what Freddie reported for the first quarter of 2008. After Freddie Mac reported a second-quarter net loss, Bill Gross, one of the world’s largest mutual fund managers who focuses mostly on bonds, that the “U.S. Treasury will probably be forced to buy $10 billion to $30 billion of preferred shares in both Fannie Mae and Freddie Mac to help shore up their capital.”

A few days back, former St. Louis Federal Reserve President William Poole also said in an interview that the chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac.