The US government is close to finalising a plan to bail out Freddie Mac and Fannie Mae, the two mortgage giants which collectively underpin America’s entire housing market.

An announcement on the plan, which analysts believe is most likely to involve a cash injection of billions of dollars into the two groups, could be announced as early as this weekend after a meeting yesterday between Ben Bernanke, chairman of the US Federal Reserve and Henry Paulson, the Treasury Secretary.

The government is also thought to be considering an alternative plan to lend money to the groups’ rather than investing cash directly.

Morgan Stanley is working with the government on the plan, which is likely to include senior management changes at both Fannie and Freddie.

The bailout would come two months after the US government received approval from Congress to pursue a range of measures to help prop up the mortgage giants. These include the ability to effectively take control of the two groups by injecting an unlimited amount of taxpayers money into them in return for newly issued shares that would give the government a majority stake.

Fannie and Freddie jointly own or guarantee about half of America’s $12,000 billion worth of outstanding residential mortgages. They are a crucial source of homeloan financing, buying mortgages from banks and building societies and packaging them into bonds. They sell on most of the bonds, which they guarantee, and retain a smaller portion on their balance sheets.

A Treasury spokeswoman last night declined to give details on any potential bailout, but conceded that “we are making progress on our work”.

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