The U.S. Treasury and Federal Reserve, capping a weekend of high-stakes maneuvering, attempted to shore up confidence in Fannie Mae and Freddie Mac by announcing a plan that placed the federal government firmly behind the battered mortgage giants.

In a statement timed to precede the opening of Asian markets Monday, as well as a closely watched auction of debt by Freddie, the Treasury said it plans to seek approval from Congress for a temporary increase in a longstanding Treasury line of credit for the two companies.

The Treasury also said it would seek temporary authority so that it could buy equity in either company "if needed" to ensure they have "sufficient capital to continue to serve their mission" of providing a steady flow of money into home mortgages. The plan, which requires congressional approval, also calls for a provision to give the Federal Reserve a "consultative role" in the process of setting capital requirements and other "prudential standards" for Fannie and Freddie.

The Fed's Board of Governors met Sunday in Washington and voted to grant the New York Fed authority to lend to Fannie and Freddie "should such lending prove necessary," the central bank said in a statement. The move would effectively give the two companies access to the Fed's discount window if necessary, providing a backstop in case the firms were to face a short-term funding crisis down the road.

Whether the government should prop up troubled financial institutions has become a hot political issue in the wake of the takeover of investment firm Bear Stearns Cos. by J.P. Morgan Chase & Co. Critics characterized that government-engineered deal as a bailout.

This weekend's moves constitute an attempt by the federal government to ease the potential crisis at Fannie and Freddie without intervening directly. By promising bold action if needed, officials are hoping they can instill sufficient confidence in the two companies that such intervention ultimately will prove unnecessary.

Fannie and Freddie are the nation's dominant providers of funding for home mortgages. They buy loans made by banks, package most of them into securities, and sell many to investors all over the world. Together, they own or guarantee about $5.2 trillion of U.S. home mortgages, nearly half of all mortgages outstanding.

Unique Status

The unique status of the two companies puts the government in a delicate position. They were chartered by Congress to support the mortgage market, but they are owned by shareholders. Investors have long believed that the government implicitly backs them. That allowed the two companies to borrow at favorable rates, benefiting shareholders and supporting the housing market, but putting taxpayer money at risk.

Sunday's moves, by promising government funds to keep Fannie and Freddie operational, reinforce the notion that investors can count on the government to bail them out in a crisis. Until recently, that was an idea the Bush administration had tried hard to quash.

The government can ill afford to see a financial crisis at either firm. With home prices falling and mortgage defaults rising, Congress and the administration have come to depend even more on Fannie and Freddie. If either company ran into serious financial trouble -- a prospect that seemed real last week when their stocks fell nearly 50% -- it would deal a severe blow to the housing market and the sagging economy.

Getty Images Fannie Mae headquarters in Washington, D.C.

A senior Treasury official described the steps as intended to help "stabilize" the current situation. While Treasury does not think the financial situation of either firm has deteriorated since Friday, "as we've watched market developments, we decided it was time for policymakers to act," said one administration official.

The weekend move means that Fed Chairman Ben Bernanke, who has been steadily accumulating authority as the U.S. grapples with the financial crisis, will have even more power. The Treasury envisions the Fed working with the mortgage giants' regulator to help prevent situations that could be a risk for the entire financial system. The move builds on Treasury's broader goal of remaking financial regulation to give the Fed broader influence over financial-market stability.

Federal regulators, politicians and investment banks spent two hectic days swapping information and seeking ways to calm markets. From Washington, Treasury Secretary Henry Paulson called the heads of some investment banks, trying to gauge the level of nervousness about Fannie and Freddie and to determine whether the banks would participate in Monday's $3 billion debt auction, according to people familiar with the matter. Timothy Geithner, president of the Federal Reserve Bank of New York, also has been reaching out to Wall Street firms over the weekend to discuss the latest events.

Fed, Treasury and company officials stayed in touch with top Capitol Hill lawmakers and their staffs throughout the weekend. Lawmakers continued their efforts to reassure financial markets about the government's support of both companies.

Fannie Mae Chief Executive Officer Daniel Mudd expressed gratitude for the government's actions. "Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market," he said.

If either company asks for it, it could have access to a line of credit or an equity investment by the U.S. government. Both the line of credit and the liquidity backstop would be temporary, but could be in place for up to 18 months. Treasury would not say how high the line of credit might go, or how much of an equity stake Treasury might purchase. The agency would not discuss whether the equity stake would carry any preferred terms for the government. Those decisions would be up to Mr. Paulson, the official said, and "will be governed by protecting the taxpayers and the government."

The two companies' lines of credit are currently capped at $2.25 billion each. The Treasury didn't say to what level they would be increased. The Fed's role is intended as a funding backstop for the firms only after they've borrowed under their credit line from Treasury. The central bank can lend under its own authority, without further congressional approval.

Raising the Treasury credit line, along with most other changes, would require congressional approval, although lawmakers appear ready to act quickly. Late Friday, the Senate passed a housing package that would create a new, stronger regulator for Fannie, Freddie and the 12 Federal Home Loan Banks. The House passed a similar bill in May, but the process since then has been stalled by complications.

The bill could pick up speed now. Lawmakers only need to resolve a few differences, and potentially to add the changes. House Financial Services Committee Chairman Barney Frank (D., Mass.) said he spoke with Mr. Paulson several times over the weekend and was "generally supportive" of the proposals. He said all sides would have to discuss the details of the plan, but he felt optimistic that a consensus could be reached quickly. "This could be on the president's desk next week," he said.

The Treasury official said Mr. Paulson has reached out to members of Congress and has had "good productive conversations....There's nothing to suggest that we will not be able to accomplish this."

The Sunday move was designed in part to head off fears about Monday's auction of Freddie Mac notes. While small, the planned sale had assumed an outsized importance as a test of investor confidence. Freddie should be able to find buyers for its three- and six-month notes, market analysts said. But there is a chance that some financial institutions and investors may demand higher-then-usual yields.

Similar Freddie and Fannie notes that are currently outstanding yield around 2.5%. If weak demand for Freddie's auction leads to sharply higher yields on the new notes, that could trigger a selloff across a wide range of debt issued by the companies, some analysts said. But most said such a scenario is unlikely.

There was some debate within the administration about the best way to handle the two companies. Some Republicans have long worried that taxpayers would eventually be on the hook for risks taken by the two companies on behalf of shareholders.

Tough Love

Some officials at the White House are believed to have preferred a tough-love approach. Under one option, according to people familiar with the outlines of policy discussions within the administration, the White House could try to install a new slate of presidentially appointed board members at the companies. The idea would be to impose more market discipline on the two companies, to curb their appetites for borrowing and investing, and to gradually shrink their enormous balance sheets.

Appointment of new presidential directors would be an abandonment -- at least for now -- of the Bush administration's often-stated ambition to distance the federal government from the companies. The new board members would be drawn from the ranks of financial-market heavyweights.

Fannie and Freddie shares both dropped about 45% last week and are down more than 80% over the past year. Investors are worried that the companies eventually will have to raise large amounts of capital to cope with growing losses stemming from mortgage defaults. Freddie has announced plans to raise $5.5 billion by selling common and preferred shares, but it is likely to wait for a calmer market. Fannie raised $7.4 billion in share offerings in April and May.

Like Fannie and Freddie, the 12 regional Federal Home Loan Banks, cooperatives that lend to commercial banks and thrifts, "also would have temporary access to expanded lines of credit," a Treasury official said.

A spokesman for Freddie said the company understands that any purchase of equity in Freddie by the Treasury "can only occur with the mutual agreement of both parties."

--Damian Paletta, John D. McKinnon, Serena Ng contributed to this article.

Write to Sudeep Reddy at sudeep.reddy@wsj.com

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