Even as federal officials sought to reassure investors about the financial health of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold.

Reuters A foreclosed home in Stockton, Calif., where roughly three of every four homes for sale are in or on the path to foreclosure.

Shares in the two stockholder-owned, government-sponsored companies declined sharply yet again Thursday. Freddie shares dropped 22% to $8 in 4 p.m. composite trading on the New York Stock Exchange. Fannie fell 14% to $13.20. Both stocks are down more than 80% from a year ago and at their lowest closing levels in more than 16 years.

The declines have set off a raging debate on Wall Street over whether the companies, which are crucial to the battered housing market, will need a big cash infusion and possibly government help.

One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear.

Such a move would be a drastic step and its path is uncertain, in part because few know what specific financial situation would be a trigger.

"They need a lot more capital," said John Paulson, who heads the hedge-fund manager Paulson & Co. that has made billions betting the housing market would decline. He pointed to "growing worries" about the deterioration of securities backed by mortgages as more homeowners default and home prices fall. Meanwhile, some high-profile bond investors snapped up Fannie and Freddie debt, believing the government would never allow them to default.

Bill Gross, chief investment officer of Pacific Investment Management Co., the large Newport Beach, Calif., bond manager known as Pimco, said the firm bought a large amount of Fannie Mae debt Thursday. A default would set off "a firestorm of intolerable proportions," Mr. Gross said.

At a House hearing Thursday, Treasury Secretary Henry Paulson said the firms "are playing a very important and vital role." He added: "They touch 70% of the mortgages that are made in this country. They are a very important part of our economy, a very important part of our housing market."

Federal Reserve Chairman Ben Bernanke said the firms "are playing a critical role" in the mortgage market, but "I think they could do an even a better job if they were better supervised and better capitalized." Both the Fed and the Treasury are pressing Congress to pass legislation that would create a stronger regulator for Fannie and Freddie. The Fed and Treasury also have been pressuring Fannie and Freddie to raise more capital.

'Too Important'

Politicians in both parties expressed their confidence in the companies and pledged to take action if things worsen.

"Fannie Mae and Freddie Mac are too important to go under," said Democratic Sen. Charles Schumer of New York. "...If they need additional support, Congress will act quickly." But he added in an interview: "We're not at that stage. I hope and think it won't be needed."

A Treasury spokeswoman said: "As Secretary Paulson said today, we're not going to speculate about 'what ifs' on Fannie and Freddie. What we're focused on is legislative reform."

Congress created Fannie and Freddie to ensure money for home mortgages would be reliably available. Though the Treasury takes pains to say the U.S. government doesn't guarantee their debts, most investors believe the government would bail out the companies, if needed. That allows them to borrow money at lower interest rates, only modestly higher than those paid by the Treasury.

Fannie and Freddie own or guarantee about $5.2 trillion of U.S. home mortgages, or nearly half of those outstanding. Their ability to provide money for mortgages is vital to the government's efforts to shore up the slumping U.S. housing market.

A Freddie spokeswoman said the company has the capital it needs to "enable us to continue to support the nation's housing markets." A Fannie spokesman said the company's capital is well above the minimum required by law and "will allow us to fulfill our congressionally chartered mission now and in the future."

Bankers and analysts are discussing various possible ways that the government could prop up Fannie and Freddie if they are unable to raise capital on their own.

In an email sent to clients Thursday morning, Beth Hammack, who heads trading in Fannie and Freddie debt at Goldman Sachs Group Inc., said she sees "many good options" falling short of the government taking over the companies. Among them, she said, would be a purchase by the Fed of some of their debt or mortgage-backed securities. A spokesman for Goldman, which is advising Freddie on possible ways to raise capital, said the views were Ms. Hammack's and not necessarily those of the firm.

If things get bad enough, said Bob Napoli, an analyst at the securities firm Piper Jaffray & Co., the Federal Reserve could make large, 10-year loans to the companies "to make it clear that they have enough capital."

Other possibilities might include the Treasury buying stock in the companies. In an extreme situation, the government might have to take over the companies in a transaction that might leave little or nothing for existing shareholders.

Fannie and Freddie still might raise enough money from private investors and avoid the need for government support. An investment from a private-equity firm is another option, but one issue for them would be whether they can feel confident in their ability to assess the risks of these heavily regulated companies with huge exposure to the weak housing market. And their capital needs are so large that a typical-size private-equity injection might be insufficient.

Hard to Assess

"You could look at every asset they own and still not come away with a real view on what the risks are," said Joshua Siegel, managing principal at StoneCastle Partners LLC, a private-equity firm that invests in banks. "That's because there isn't enough historical evidence to know how these assets will perform because we've never seen a real-estate cycle like this before."

The vast majority of mortgages owned or guaranteed by Fannie and Freddie are prime, fixed-rate loans on which borrowers are current. As of April, Fannie said just 1.22% of the single-family loans it owns or guarantees were 90 days or more overdue, and Freddie's equivalent delinquency rate is 0.81%.

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Yet the companies have recorded combined losses of $11 billion for the nine months ended March 31. That includes losses realized on the sale of foreclosed homes and provisions for future loan losses, as well as adjusting downward the value of mortgages and related securities. Further heavy losses are likely. Paul Miller, an analyst at Friedman Billings Ramsey & Co., said he doesn't expect the companies to be solidly back in the black until 2011.

One big problem is that the companies never have been required to hold much capital, partly because regulators and Congress used to believe that there wasn't much risk of wide-spread defaults on home mortgages. As of March 31, the companies reported combined capital of $81 billion, only about 1.6% of the mortgages they own or guarantee.

That leaves little cushion for absorbing losses and means they may have to raise large amounts of additional capital. Fannie raised $7.4 billion of capital in April and May through sales of common and preferred shares. Freddie has announced plans to raise $5.5 billion, perhaps in August after second-quarter results are announced.

Mr. Miller said they may need to raise an additional $15 billion apiece to cope with losses on the current wave of foreclosures. Other analysts, such as Mr. Napoli, said they doubt the capital needs will be so large. Much will depend on how much further house prices fall, which will help determine the extent of losses on foreclosed homes.

"Regulators, government officials and others can say they have enough capital, but Mr. Market doesn't believe it," said James Ellman, president of Seacliff Capital LLC, a $200 million hedge fund. "The market is telling us that neither Fannie nor Freddie have enough capital to cover the projected losses from their mortgage-insurance book of business." Mr. Ellman doesn't have a position in either company.

Firms Still Have Fans

Not everyone is giving up on Fannie and Freddie, however. Indeed, the mortgage companies have a legion of devoted fans, some of whom have been buying shares in recent months and now are suffering. Legg Mason Capital Management Inc. owned 50.2 million shares of Freddie as of the end of the first quarter, making it the second-largest shareholder, and the firm added 35.6 million shares during that quarter. A spokeswoman for the firm wouldn't comment on its current holdings.

Richard Pzena, who runs Pzena Asset Management, a New York firm that was the fifth-largest holder of Freddie and the ninth-largest holder of Fannie shares at the end of the first quarter, says his firm isn't selling the stocks.

"I've looked at this over and over again, and I don't see insolvency issues," he says. "It's a panic, for sure, and that itself can lead to problems, and Freddie has to raise capital, but there's no alarming rise in delinquency rates, losses" or other measures of the companies' health.

Bonds Hold Up

Fannie and Freddie's bonds haven't sold off to the same extent as their shares; by some measures they are implying less risk than in mid-March, when tensions in the credit markets peaked. "Given how much the shares have fallen, if these were any other financial institutions, their cost of financing would have gone up much more," said Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays Capital.

On Thursday, two-year agency bonds were yielding 0.78 percentage point over Treasury bonds; that gap is double what it was a year ago but analysts say the agencies' financing costs aren't prohibitively high. In the derivatives market, where traders buy and sell contracts that provide protection against bond defaults, the cost of insuring Fannie and Freddie debt has risen 20% this week alone. Still, that cost is a small fraction of what it cost to insure the debt of Bear Stearns Cos. in the days before the Wall Street firm was bought, with the aid of the Fed, by J.P. Morgan Chase & Co. in March.

--Serena Ng. Sudeep Reddy, Damian Paletta, Deborah Solomon and Peter Lattman contributed to this article.

Write to James R. Hagerty at bob.hagerty@wsj.com, Gregory Zuckerman at gregory.zuckerman@wsj.com and Craig Karmin at craig.karmin@wsj.com

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