Between them Freddie Mac and Fannie Mae finance or guarantee nearly half of the outstanding mortgages in the US, and have lost billions of dollars during the US housing crash.
Much of their bond debt was ultimately held by Asian banks, who had recently begun withdrawing their investment.
The most recent figures show that about 9% of US mortgage holders were behind on their payments or faced repossession.
The rescue could cost the Federal government $200bn (£100bn) as it invests fresh capital into the stricken mortgage giants to keep them solvent.
But a collapse of the two lenders would have frozen US mortgage lending for years, and would likely have lead to even steeper declines in house prices.
According to one widely-reported index, US house prices are falling at an annual rate of more than 15% in major metropolitan areas, putting many people in negative equity.
The rescue plan reassured investors worldwide who feared that a collapse of the government-sponsored enterprises could have a ripple effect on financial markets, with further losses by major banks leading to yet further cutbacks in credit and lending.
Mr Paulson said the government was intervening in the wider interests of the financial system and of taxpayers since the financial position of the two firms was fast deteriorating.
The move is intended to keep the two companies afloat, amid fears that either could go bankrupt as borrowers default on their home loans.
Together, Freddie Mac and Fannie Mae own or guarantee about $5.3 trillion (£3 trillion) of mortgages.
But they have made a combined loss of about $14bn in the past year and officials were worried that they would no longer be able to continue functioning if such losses continued.
Banks around the world are highly exposed to the two companies and therefore, given the febrile state of markets across the world, it had become dangerous for doubts to persist about whether they were viable and would be able to keep up the payments on their massive liabilities, says the BBC's business editor Robert Peston.
A rescue plan passed by Congress in July gave the US government the authority to offer unlimited liquidity to the two companies, and to buy their shares, in order to keep them afloat.
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