WASHINGTON (Bloomberg) — Treasury Secretary Henry Paulson sought blanket authority from Congress to buy equity stakes in and lend to Fannie Mae and Freddie Mac, aiming to stem the collapse of confidence in the largest sources of US mortgage financing.

Paulson will propose to Congress a "temporary" increase of the companies' lines of credit with the Treasury from the current $2.25 billion each, and the right to buy equity "if needed", according to a statement released yesterday by the department in Washington.

Freddie Mac is scheduled to sell $3 billion in short-term notes today, and Paulson's comments indicate a growing concern that a crisis of confidence may take hold if demand for the debt is weak. The plan, which requires congressional approval, would give Paulson power to buy an unspecified amount of stock in Fannie Mae and Freddie Mac, a Treasury official told reporters.

A third element of the proposal would give the Federal Reserve a "consultative role" overseeing the companies' capital requirements. The Fed separately announced it will let the companies borrow directly from the Fed at the same discount rate as commercial banks.

Debt sold by Fannie Mae and Freddie Mac "is held by financial institutions around the world," Paulson said in the statement. "Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets."

Freddie Mac shares tumbled 47 percent in New York Stock Exchange composite trading last week and Washington-based Fannie Mae lost 45 percent of its value, forcing Paulson to issue a statement of support for the companies in their "current form".

Fannie Mae and Freddie Mac are critical for the housing market because they guarantee almost half the $12 trillion in outstanding US mortgages.

"Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer," Paulson said. "I look forward to working closely with congressional leaders to enact this legislation as soon as possible, as one complete package."

The government-chartered, publicly traded companies have already raised $20 billion to cover losses amid the highest delinquency rates in at least 29 years. Freddie Mac said earlier this month it planned to sell $5.5 billion of equity after it reports earnings next month.

The companies issue debt to raise money for their purchases of mortgage securities. Fannie Mae and Freddie Mac accounted for about 81 percent of demand in the first quarter as other buyers retreated. They also issue mortgage-backed bonds known as agency debt.