Washington - The US government seized control of Fannie Mae and Freddie Mac Sunday, seeking to deflect the rising threat of mortgage defaults to the two companies that manage about half of the US home loan market.

US President George W Bush indicated the urgency of the situation, saying that the takeover would "prevent a disruption of our financial system."

The Federal Housing Financing Agency (FHFA) is taking over Fannie and Freddie under a so-called conservatorship and replacing their chief executives and eliminating their dividends.

The US Treasury is to purchase up to 100 billion dollars of senior-preferred stock in each company.

Bush noted that Freddie and Fannie could not "continue to operate safely and soundly" without government intervention, "posing an unacceptable risk to the broader financial system and our economy."

"Putting these companies on sound financial footing, and reforming their business practices, is critical to the health of our financial system and to making further progress with the housing correction that today is weighing heavily on our economy," Bush said in a statement.

He noted that the measures were "temporary" but aimed to bring about permanent change in the way Fannie and Freddie do business. It was "crucial that they not pose similar risks to our economy or the financial system again," the president said.

Treasury Secretary Henry Paulson engineered the takeover along with Federal Housing Finance Agency Director James Lockhart.

"It is necessary to take action," Paulson said. "Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner."

Federal Reserve head Ben Bernanke "strongly" endorsed the move.

"These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," he said.

Presidential candidates Barack Obama and John McCain gave their support for the federal rescue, but added the bailout should not be used to prop up executives and vested interests who have pocketed enormous profits during the housing boom that abruptly ended in 2007.

"This plan must not focus on the whims of lobbyists and special interests worried about their bonuses and hourly fees," said Obama, 47, the Democratic nominee.

McCain, 72, said it was important to "keep people in their homes" but the plan should not be used to "bailout Wall Street speculators."

The takeover derived legal basis in a law passed by Congress in early August that gave the Bush administration authority to inject capital into the two government-sponsored mortgage-finance companies.

Fannie and Freddie have suffered 14.9 billion dollars in losses from the widening mortgage foreclosure crisis in the US that has rippled outward to foreign investors. The central banks of many countries, including those in Asia, hold considerable stock in Fannie and Freddie.

Fannie's market capitalization is now 7.6 billion dollars, down from 38.9 billion dollars at the end of last year, Bloomberg financial news service reported.

Freddie's has fallen to 3.3 billion dollars from 22 billion dollars over the same period.

Fannie and Freddie together manage nearly half of the 12-trillion- dollar US mortgage market. The two are chartered by the federal government but have publicly traded shares.

The number of new mortgage holders entering foreclosure in the second quarter stood at 1.19 per cent of all US mortgages, the Mortgage Bankers Association said Friday, the first time the rate has topped 1 per cent in the 29-year-history of the association's record keeping.

The bill passed in August also allowed up to 400,000 mortgage- holders to refinance into low-interest government loans - effectively guaranteeing 300 billion dollars worth of new mortgages.

Senators Obama and McCain issued stern warnings about the wisdom of the bailout by taxpayers.

Obama said that companies can't be permitted to reap profits during boom times and then look to the federal government for help when the market goes awry.

McCain told CBS broadcaster that Paulson had assured him that when the housing market picks back up "taxpayers are going to be the first to be paid off." (dpa)