The Obama administration pledged on Thursday to back beleaguered mortgage finance giants Fannie Mae and Freddie Mac no matter how big their losses may be in the next three years.

It also jettisoned a demand that the two companies cut the size of their mortgage-related investment portfolios next year, allowing them to provide even more support in the near term for a housing market recovering from its worst slump in decades.

The Treasury Department said it made the changes to assure financial markets it stood firmly behind both companies and t

o buy more time for the two government-sponsored enterprises to whittle down their mortgage-related holdings.

The two agencies each had a Treasury credit line of $200 billion. Combined, they have so far tapped about $111 billion.

The Treasury's announcement came just hours after the companies said their chief executives would be paid up to $6 million on an annualized basis for 2009.

Few analysts had expected Freddie Mac to tap full the $200 billion, but Fannie Mae's poor underwriting standards left it with losses many thought could grow past $200 billion.

The administration waited until financial markets had closed on Christmas eve to make the announcement, thwarting chances for critics to have their voices heard.

This news today won't ruin anyone's Christmas. That is, except for those who are worried about the size of the nation's debt, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Under a law put in place before the government seized the two mortgage agencies in September 2008, Treasury Secretary Timothy Geithner had until the end of this year to increase the limit without asking Congress for approval.

Treasury said Fannie Mae and Freddie Mac would still need to reduce their portfolios eventually.

Under the new rules, their holdings could be no larger than $810 billion at the end of next year. The limit would drop by 10 percent a year thereafter, lessening the support they could provide to the mortgage market.

Fannie Mae and Freddie Mac are congressionally chartered companies that buy up mortgages from banks and other originators to keep mortgage markets liquid. Some of the debt is repackaged as securities and sold off to investors, and the government has been buying an increasing share.

Each company currently holds portfolios in the high $700 billion range, officials said, meaning that they would not be forced to sell assets next year.

HOUSING STILL NEEDS A LIFELINE

The 2010 reprieve was designed in part to avoid putting an added strain on the housing sector as the Treasury and Federal Reserve wrap up programs to purchase mortgage-related debt.

As part of its announcement, Treasury said it was ending its mortgage-backed securities purchase program at the end of this year and the Fed has previously said it would wind down its separate program in the spring.

The Obama administration hopes its unlimited guarantee will bolster investor confidence and bring private sector buyers back into the market to help hold down mortgage costs.

Without healthy demand for MBS and the debt of the two finance companies, mortgage rates would likely spike, sending a chill through the still-shaky housing market.

The administration has already said it plans to lay out a vision for the future of the two agencies in the president's fiscal 2011 budget proposal in February.

The administration will have to determine what their status will be to support the housing market -- whether they stay as some kind of government-sponsored enterprises, become fully privatized or become full government agencies, said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York

Thursday's announcement was reminiscent of former Treasury Secretary Henry Paulson's colorful remark to Congress in July 2008, when he was lobbying for the bailout of Fannie Mae and Freddie Mac. Paulson told lawmakers that giving him authority to rescue the firms would reassure private investors.

If you have a bazooka in your pocket and people know it, you probably won't have to use it, he said at the time.

However, less than two months later, the two companies were placed in a government conservatorship. Early in Obama's administration, the credit line for the firms was doubled to $200 billion each. It is now unlimited for three years.

Freddie mac Timothy geithner Fannie mae