Mortgage giant Freddie Mac -- emboldened by emergency regulatory actions that have triggered a two-day rebound in its battered stock -- is considering raising capital by selling as much as $10 billion in new shares to investors, according to people familiar with the matter.

The selling of new shares would have the potential to avoid a full-blown government rescue for Freddie Mac and Fannie Mae, twin keystones of the U.S. housing market. The publicly traded, government-sponsored companies own or guarantee about $5.2 trillion of home mortgages, or nearly half the total outstanding, and are at the center of government efforts to prop up the sagging housing market.

Shares of Freddie were up $1.19, or 14%, to $9.52 in midday trading Friday on the New York Stock Exchange.

Freddie Makes Step Friday

In the latest development, Freddie filed a form with the Securities and Exchange Commission Friday morning that marks a final step toward registering its common stock with the agency. The filing of a Form 10 registration statement indicates that the shares could be registered as early as today.

Chairman and Chief Executive Richard Syron said the registration tag "marks an important milestone for the company and demonstrates our commitment to enhanced transparency and financial reporting."

Chief Financial Officer Buddy Piszel added, "We conclude what was a difficult chapter in Freddie Mac's history and join the ranks of other large, public financial institutions as an SEC registrant."

That step would remove one obstacle that has kept the company from raising capital. Lawyers in recent weeks advised the mortgage company to hold off on share offerings until the registration process could be completed. The company had expected to be registered by mid-year. That delay in raising capital rattled investors, helping cause a plunge in shares of Freddie and its rival Fannie Mae last week. The shares have recovered somewhat over the past two days.

In 2002, after years of fighting off the idea, Freddie and Fannie had agreed to register their common stock with the SEC and subject themselves to that agency's filing requirements like normal corporations. Fannie met the registration requirements in 2003. Freddie was delayed by the need to overhaul its books and internal risk controls after findings in 2003 that it violated accounting rules.

Worries About Mortgage Losses

Both companies' stock fell about 45% last week amid worry about whether they have enough capital to cover mortgage losses. The depth of their troubles spurred the Treasury Department on Sunday to unveil an unusual plan to temporarily extend an unspecified credit line to both companies -- as well as buy stock in them if necessary.

That plan quickly came under fire on Capitol Hill. Critics argue it could cost American taxpayers billions of dollars.

For its part, Freddie would like to avoid the stricter government oversight that could accompany any rescue. Its moves come as new details emerge about its recent stumbles.

INTERVIEW EXCERPTS • "We're considering the full array of options before us …. We're not at the stage of talking about the exact when." Read more excerpts from an interview with Mr. Syron.MORE • Deal Journal: Freddie Mac's Odd Way of Raising Money• Woes May Hurt Fannie, Freddie's Lobbying Clout• Rescue Plan Is Latest Risk Taken on by Taxpayers

The past two days have raised hopes at Freddie for a sale of shares to investors other than the Treasury. Freddie and Fannie shares both surged more than 29% on Wednesday, a day after the Securities and Exchange Commission set emergency rules limiting the ability of bearish investors to place aggressive bets that their stocks would keep falling.

A sale by Freddie of common and preferred stock could be tough to pull off. For starters, the preferred shares would require Freddie to offer a very high rate of return to attract buyers. The yield on one existing issue of Freddie's preferred stock, for example, is about 13.8%.

At that rate, even a $5 billion preferred-stock offering would entail a $690 million annual payout, on top of the $272 million Freddie paid out on its existing preferred shares in the first quarter. That would reduce the money available to common-stock shareholders, cutting the value of those holdings and potentially sending the stock price lower.

The main buyers for any new-stock issues are likely to be existing shareholders world-wide, according to one person involved in the discussion, adding that a definitive plan hasn't yet been determined.

In the short term, a sale of new shares might eliminate the need for the Treasury's help, but a government bailout might still be required later. "At the heart of this crisis of confidence is uncertainty about the true financial condition of the companies," says Armando Falcon Jr., their former regulator.

Analysts expect that Freddie and Fannie both will face significant losses in the months ahead as the housing crisis shows no signs of slowing. Both companies, which were originally chartered by acts of Congress, buy mortgages from lenders. They package those loans into securities for their own investment portfolios and for sale to investors world-wide.

The two companies -- which are rivals in the same business -- have reported a combined $11 billion of losses over the past three quarters, largely because of increasing defaults by homeowners on mortgages. When homeowners don't make mortgage payments, Fannie and Freddie must reimburse the holders of securities backed by those defaulting mortgages. At the same time, falling home prices cut the value of the collateral backing the loans, increasing losses for Fannie and Freddie.

Investors and analysts can only guess how bad the losses might be as several million American homes go through foreclosure. Analysts at Goldman Sachs Group Inc. this week estimated that Fannie faces default-related losses of $32 billion and Freddie $21 billion. Those losses, expected to be mostly realized over the next few years, will be offset to some extent by growing revenues and higher fees the companies can now charge.

Freddie's board met Thursday to review options for selling new shares. Freddie Mac CEO Mr. Syron has huddled frequently with investment bankers from Morgan Stanley and Goldman Sachs Group Inc. and has held two board meetings this week at Freddie's New York office. The proceeds of a sale are expected to be in the range of $5 billion to $10 billion, according to people close to the discussions.

One idea that has been raised is a "rights offering" of shares, in which existing shareholders get first dibs on the new stock. Freddie, for its part, says it has plenty of cash for now and has hinted that it could resort to eliminating its dividend, for savings of $650 million a year.

In an interview, Mr. Syron said Freddie's board has been discussing "the full array of options before us," declining to give specifics. He said it was too early to specify when Freddie would raise capital, adding: "We're not at the stage of talking about the exact when."

The push to court private investors, rather than accept government money, illustrates how much Freddie Mac wants to avoid the potential for additional government controls. Congressional approval of a government bailout would likely entail new restraints on how it conducts business.

For instance, if loans or investments are made with government money, lawmakers are weighing provisions to prevent the two companies from paying dividends to shareholders or issuing big paychecks to their management, says Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee. Government assistance could require Fannie and Freddie to consult the government "before it can even pay its water bill for the toilet," Rep. Frank said in an interview. He supports what the Treasury has proposed, which is to provide money for the two companies if needed.

Mr. Syron said he hopes he won't need the government's help, or face the possible consequences, such as getting bills approved by the federal government. "I'm kind of partial to indoor plumbing," he quipped during an interview, in response to Rep. Frank's comment.

The discussions come as both Freddie and its bigger rival, Fannie, continue to struggle to balance their shareholders' desire for big profits and the government's demand that they provide plenty of funding for home loans, even if that hurts their profits in the short term.

It's unclear how shareholders would react to the plan. At least one shareholder, David Dreman, whose Dreman Value Management owns more than 10 million shares, says Freddie might benefit from waiting a month or so to do such an offering. "Yields may go down and prices could go up after the government's initiatives kick in," says Mr. Dreman. "There shouldn't be such a rush to get to the party at this point." Still, he says, it is good corporate governance to give existing shareholders first dibs.

The government's proposal to offer a rescue if needed means that, for the time being, Freddie and Fannie are effectively wards of the state. As a result, taxpayers would pay the bill if either company were to fall apart.

Growth at a Dizzying Pace

The seeds of the companies' capital questions were sown in 1992. Lobbyists from Fannie and Freddie persuaded Congress they didn't need to hold much capital as a cushion against homeowner defaults, which were expected to be small.

Fannie and Freddie grew at a dizzying pace, raising their combined holdings of mortgages to $1.58 trillion in 2003 from $136 billion in 1990. They dominated their industry, providing funding or guarantees for 57% of all U.S. home mortgages in 2003, according to Inside Mortgage Finance, a trade publication.

That control weakened a few years back amid accounting irregularities at Fannie and Freddie and aggressive lending by other financial firms, particularly in "subprime" and other risky mortgages to low-end borrowers. Eager to regain market share, Fannie and Freddie started buying riskier mortgages themselves.

Still, when the credit crunch hit last year, Fannie and Freddie appeared to be in relatively good shape. They had avoided some of the worst lending practices, and their Wall Street rivals were on the ropes. The companies' market share shot up to 68% in this year's first quarter from 45% a year earlier.

As rivals faltered, Freddie last autumn put a note on its Web site titled "Shelter in a Storm," declaring: "Even when other lenders stop lending, we continue to provide a steady source of home funding."

But it turned out that Fannie and Freddie weren't safe from that storm. They stunned investors by reporting combined losses of about $3.5 billion in the third quarter of last year.

That cut deeply into the small amounts of capital held by Fannie and Freddie. Late last year, Fannie and Freddie scrambled to shore up their capital by selling a combined $13 billion of preferred shares. Selling those shares meant a big chunk of future profits would go to the preferred holders rather than the owners of common shares.

At an investor conference in December, Mr. Syron apologized to Freddie's holders of common shares: "We wanted to dilute common shareholders like we wanted to shoot ourselves in the head with a gun," he said.

The companies reported further losses in the following quarters. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke began publicly exhorting them and other big financial companies to raise more capital, as quickly as possible, to cope with the avalanche of foreclosures ahead.

Feeling the Heat

The pressure reached a peak in March. Bear Stearns Cos. collapsed after clients pulled their money from the firm amid concerns over its own capital cushion. The securities firm was sold in a fire sale to J.P. Morgan Chase & Co.

Mr. Syron, who rose from modest beginnings as the son of a garbage man to earn a doctorate in economics at Tufts University, was feeling the heat. Around that time, he had taken his wife to Florida for a weekend getaway, but as soon as they headed off for a bike ride, he got a call from a top official on his cellphone. He started concentrating so intently on the call, he recalls, that he didn't notice that his wife had crashed her bike.

When they got back to the hotel, Mr. Syron recalls, his wife lambasted him: "You left me writhing in pain."

By May, rival Fannie had raised $7.4 billion of capital by selling common and preferred shares.

Freddie promised to raise $5.5 billion of its own. "It's better to go fast than slow," Freddie's CFO Mr. Piszel, urged Mr. Syron.

The company didn't move quickly enough. Fears about the mortgage giants reignited July 7, when Lehman analyst Bruce Harting released a report saying Freddie and Fannie might need to raise a combined $75 billion under a proposed accounting rule.

Even though it's unlikely the rule would even apply to the firm, investors began selling the shares of Freddie and Fannie. Others engaged in "short sales," or bets that the shares would decline. Both companies' shares went into a dive.

As of March 31, Freddie had "core capital" -- a measure of financial strength consisting of retained earnings and other items -- totaling $38.3 billion. That works out to 1.8% of the $2.15 trillion of mortgages Freddie owned or guaranteed as of that date.

That's low compared with the requirements placed on other financial institutions, such as banks. Indeed, if Freddie were a bank, it would need about $91 billion to be considered well-capitalized, says Karen Petrou, managing partner at research firm Federal Financial Analytics in Washington. Her firm does consulting work for trade associations that are sometimes publicly critical of Fannie and Freddie.

Freddie officials and its regulator say the company easily exceeds its minimum capital requirements.

As concerns mounted last week over Freddie, Mr. Syron manned the phones with rattled shareholders, directors and top U.S. officials, including Fed Chairman Bernanke.

On Saturday, Mr. Syron canceled plans for a weekend trip to visit relatives in Boston. Instead, he and top aides huddled in Freddie's headquarters near a mall in McLean, Va. In a glass-walled conference room, executives weighed their financial options over sandwiches from a Cosi restaurant and a case of Diet Coke.

The work continued well past midnight. At 1:30 a.m. Sunday, Freddie's top lawyer and business officer tried to phone the chief financial officer, Mr. Piszel, at home, but reached his 14-year-old daughter instead.

"Are you sure you want me to wake Dad?" Mr. Piszel's daughter asked. The two assured her that they did.

Later that day, the Treasury announced its rescue proposal.

--Damian Paletta contributed to this article.

Write to Susan Pulliam at susan.pulliam@wsj.com

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