THE United States government plans to take over Fannie Mae and Freddie Mac and all shareholders of the two mortgage giants may take a hit, a law maker said on Saturday.

The move to take control of the two companies could amount to the largest financial bailout in the nation's history, and is a bid to ward off further damage to a housing market in its deepest downturn since the Great Depression.

"I think all shareholders will be disadvantaged," Republican Barney Frank, chairman of the US House of Representatives Financial Services Committee, said.

"The government will act as the new management," implying the chief executives would be ousted, according to Frank, who spoke to US Treasury Secretary Paulson on Friday about the plan to put the companies into federal conservatorship to protect the interest of all parties.

An industry source said the two government-sponsored enterprises were sent a letter by their regulator, the Federal Housing Finance Agency, detailing shortcomings at the companies and explaining why the federal government was taking control. The source said the letter suggested the companies, which own or guarantee almost half of the country's US$12 trillion in outstanding home mortgage debt, should agree to the arrangement in order to avoid the more onerous step of being placed in a receivership in the interests of debt-holders.

In a separate interview with The Washington Post, Frank said the government was expected to control the companies for at least a year as it considers whether they should remain government-run, or be restructured.

Companies clam up

Paulson, Federal Reserve Chairman Ben Bernanke, and the director of the companies' regulator, James Lockhart, met with the chief executives of the two companies on Friday to detail the plan.

Fannie Mae has argued it is in a stronger capital position than Freddie Mac and had fulfilled a promise to raise funds, but there was no sign that the claims gained traction.

The US Treasury, the Federal Reserve and Freddie Mac declined to comment. Fannie Mae did not return calls seeking comment. The planned intervention reflects concerns among US officials that financial markets had begun to lose confidence in the companies, after they suffered combined losses of nearly US$14 billion in the last four quarters.

The stocks of the two companies have fallen more than 90 percent in the past year and in recent months foreign investors have pared their holdings of the companies' securities. In an emergency move in July, the US Congress gave the Treasury the authority to extend an undetermined amount of credit to the companies or take a stake in them if they ran into trouble.