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By Kevin Plumberg
HONG KONG, July 11 (Reuters) - The U.S. government is considering taking over mortgage finance companies Fannie Mae and Freddie Mac if their funding problems worsen, in a plan that could leave shareholders nothing, the New York Times reported, citing people briefed on the matter.
Fannie FNM.N and Freddie FRE.N, government-sponsored entities that have an implicit backing of Washington, have been under fire this week as investors questioned the companies' ability to raise enough capital to stay afloat.
Shares in the companies fell on Thursday to their lowest levels since 1991.
The New York Times said the government was considering placing the companies into conservatorship, under which the shares would be worth little or nothing, and the losses on the home loans they own or guarantee -- what amounts to half of all U.S. mortgages -- would be paid by U.S. taxpayers.
Officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie were not considered to be in crisis, the newspaper said on its website late on Thursday.
A spokesman for Freddie Mac declined to comment. Fannie Mae and U.S. officials could not be reached for comment.
The fate of Fannie and Freddie has ramifications far outside of the United States. U.S. agency debt and agency-issued mortgage bonds held by foreign central banks -- many of whom are located in Asia -- swelled by $9 billion in the last week, totalling a record $978.98 billion, up 18 percent so far this year.
The dollar initially gained on the report, government bonds fell and stock markets climbed as investors felt a sense of relief, having fretted about the fate of the mortgage lenders. That optimism was misplaced, analysts said.
"If the situation is that serious, the U.S. stock market is likely to fall further on risk aversion and on concerns of a massive new share issue to capitalise the mortgage firms," said Hideki Hayashi, chief economist at Shinko Securities in Tokyo.
"The expected volatility in the stock market should result in a weaker dollar."
A government rescue of both companies would mark the second time that Washington has had to step in to support the financial system since mounting defaults in the U.S. subprime mortgage industry grew into a global credit crisis in August 2007.
The first time was four months ago when the Federal Reserve backed a plan for JPMorgan (JPM.N) to buy investment bank Bear Stearns for a cut-rate price.
Bond holders have obligations that would theoretically have priority in the case of insolvency. However, the quasi-governmental status of Fannie and Freddie complicates matters.
"Based on the previous experience with Bear Stearns and JPMorgan, bond holders seem to be rewarded and shareholders are significantly penalised. But this is a little more dicey because we're not dealing with a bank, we're dealing with an agency," said Jimmy Koh, a Treasury economist with United Overseas Bank in Singapore.
"If there is something seriously wrong, I really don't know what happens. We've never seen anything like this before," he said.
News the government was considering direct action to save the companies, which are pillars of the U.S. housing market, boosted Asian stock markets and helped Japan's Nikkei .N225 share average to cut its losses.
The dollar edged up against the yen having fallen all week in tandem with shares.
Safe-haven U.S. Treasury debt prices fell, pushing up the yield on the 10-year note by about 5 basis points from late Thursday US10YT=RR to 3.85 percent.
"The only positive thing about it is that the U.S. government is very keen to do something to help the financial system," said Albert Hung, chief investment officer at Alleron Investment Management in Sydney.
"Any drastic move like that will only provide some short-term relief and won't be a long-term cure."
The Bush administration had also considered calling for legislation that would give an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies, the paper said. That was seen as a less attractive option because it would effectively double the size of the national debt.
So far this week Freddie Mac shares have plunged 45 percent to $8 and Fannie Mae stock has lost 30 percent to $13.20. The companies' bonds, a favourite for Asian investors, have actually benefited from the declines in the shares.
Enough concern has built among senior government officials over the health of the giant mortgage finance companies for them to hold a series of meetings and conference calls to discuss contingency plans.
Even before this week, the stock prices of the two government-sponsored mortgage finance companies have been pummelled this year after soaring delinquencies on home loans resulted in billions of dollars of losses.
This has spawned speculation about whether they can withstand more losses as well as concerns that they may need to raise massive amounts of new capital to survive.
"This is looks like another short-term fix and we still can't see the end of the tunnel as far as the turmoil in the financial sector is concerned," said Mona Chung, fund manager with Daiwa Asset Management in Hong Kong.
The congressionally chartered companies are considered the last bastions of support for the U.S. housing market, which is suffering its worst downturn since the Great Depression. LINKS: > For the New York Times report online, click on: here =&oref=slogin&pagewanted=print > A wrapup of Thursday's news on the companies..[ID:nN10184180] > Market reaction................[ID:nL11666792] (Additional reporting by Parvathy Ullatil in Hong Kong, Geraldine Chua in Sydney and Eric Burroughs in Tokyo; editing by Neil Fullick)