WASHINGTON - The government is expected to take over Fannie Mae andFreddie Mac as soon as this weekend in a monumental move designed toprotect the mortgage market from the failure of the two companies,which together hold or guarantee half of the nation's mortgage debt, aperson briefed on the matter said Friday night.

Someof the details of the intervention, which could cost taxpayersbillions, were not yet available, but are expected to include thedeparture of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.

Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulsonand James Lockhart, the companies' chief regulator, met Fridayafternoon with the top executives from the mortgage companies andinformed them of the government's plan to put the troubled companiesinto a conservatorship.

The news, first reported on The Wall Street Journal's Web site, cameafter stock markets closed. In after-hours trading Fannie Mae's sharesplunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell$1.06, or almost 21 percent, to $4.04. Common stock in the companieswill be worth little to nothing after the government's actions.

The news also followed a report Friday by the Mortgage BankersAssociation that more than 4 million American homeowners with amortgage, a record 9 percent, were either behind on their payments orin foreclosure at the end of June.

That confirmed what investors saw in Fannie and Freddie's recentfinancial results: trouble in the mortgage market has shifted tohomeowners who had solid credit but took out exotic loans with littleor no proof of their income and assets.

Fannie Mae and Freddie Mac lost a combined $3.1 billion betweenApril and June. Half of their credit losses came from these types ofrisky loans with ballooning monthly payments.

While both companies said they had enough resources to withstand thelosses, many investors believe their financial cushions could witheraway as defaults and foreclosures mount.

Many in Washington and on Wall Street hadn't expected Paulson to intervene unless the companies had trouble issuing debt to fund their operations.

This summer, Congress passed a plan to provide unlimited governmentloans to Fannie and Freddie and to purchase stock in the two companiesif needed.

Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.

Supporters, however, argue the Bush administrationhad little choice but to support Fannie and Freddie, which togetherhold or guarantee $5 trillion in mortgages — almost half the nation'stotal.

Representatives of Fannie and Freddie declined to comment on the government assistance plan.

Treasury spokeswoman Brookly McLaughlin said officials "have been inregular communications" with Fannie and Freddie, but refused to commentsaying, "We are not going to comment on rumors."

Concern has been growing that a government rescue of Fannie andFreddie could not only wipe out common stockholders, but also be costlyfor scores of investment, banking and insurance companies that holdbillions of dollars in their preferred shares.

Paulson has been in contact in recent weeks with foreign governmentsthat hold billions of dollars of Fannie and Freddie debt to reassurethem that the United States recognizes the importance of the twocompanies.

The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.

Mudd, the son of TV anchor Roger Mudd, was elevated to Fannie Mae's top post in December 2004 when chief executive Franklin Raines and chief financial officer Timothy Howard were swept out of office in an accounting scandal.Syron was named Freddie Mac's CEO in 2003, replacing former chiefGregory Parseghian, who was ousted in after being implicated inaccounting irregularities.

He formerly was executive chairman of Thermo Electron Corp., a Waltham, Mass.-based maker of scientific equipment, served head of the American Stock Exchange and was president of the Federal Reserve Bank of Boston in the early 1990s.

Fannie Mae was created by the government in 1938, and was turnedinto a shareholder-owned company 30 years later. Freddie Mac wasestablished in 1970 to provide competition for Fannie.

A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.

But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevadaregulators shut down Silver State Bank, the 11th failure this year of afederally insured bank. And earlier this year, the governmentorchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.

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