On Sunday, the Treasury Department and the Federal Housing Finance Agency jointly summarized their plan to assume control of the troubled mortgage companies and to back the bonds issued by the companies with the full strength of the federal government.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Treasury Secretary Hank Paulson said in a statement Sunday.

Fannie and Freddie own or guarantee more than $5 trillion in U.S. mortgages -- nearly half the mortgage loans in the country.

The takeover won't help current stockholders in the two companies, who will control a much smaller share of the equity. Counterbalancing the loss of equity, to a degree, will be greater confidence in the ability of the companies to surmount the challenges they now face.

Shares of Fannie Mae plunged $5.66, or 80.4%, to $1.38 this morning; Freddie shares slumped $1.06, or 20.8%, to $4.04.

The rest of the markets took off this morning on the takeover news. At 9:32 a.m. ET, the Dow Jones Industrial Average gained 330 points to 11,550. The Nasdaq Composite Index soared 46 points to 2,302, and the Standard & Poor's 500 Index had gained 29 points at 1,271.

In Japan, stocks were up better than 3 per cent on the news from the U.S.; in Hong Kong, they were up more than 4 per cent; and in Europe, between 3 and 5 per cent.

"This is about dealing with an immediate situation," Paulson told CNBC this morning. He said the next administration and Congress will have to decide how Fannie and Freddie will function going forward. Paulson suggested that the takeover " more than any other action that I've seen done here, has advanced the ball" to help push the housing markets toward recovery.

Paul Miller, an analyst at Friedman, Billings, Ramsey, told to MarketWatch this morning that the government move "will be viewed positively by investors in our opinion and should result in a rally in financial stocks."

Fannie Mae, created by the government in 1938, and Freddie Mac, created in 1970, were developed to help Americans purchase homes. Slumping home prices and soaring mortgage delinquencies have caused the companies to suffer a combined $14 billion in losses over the past year.

Details of the takeover

The FHFA will act as conservator of Fannie and Freddie, running the companies until they are restored to better financial health. The FHFA said that dividends on common and preferred shares of both companies' stocks will be eliminated, in order to preserve capital. The Treasury Department has said it will invest up to $100 billion in each firm to keep them from going bankrupt.

Stock Charts (Year)

Fannie Mae

Freddie Mac

The plan will also allow the Treasury Department to buy mortgage-backed securities from Fannie and Freddie.

Under the terms of the takeover, Daniel Mudd, of Fannie Mae, and Richard Syron, of Freddie Mac, will leave their posts as chief executive officers of the companies, but will stay on to help the companies transition to new leadership. Mudd willl be replaced by Herb Allison, who formerly served as chairman of TIAA-CREF and vice chairman of Merrill Lynch. Syron will be replaced by David Moffett, who has been working as a senior advisor at the Carlyle Group, having retired last year as CFO of U.S. Bancorp.

"This program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs," Paulson said in a press release. GSE stands for government sponsored enterprise.

"Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking."

Reaction to the plan

"This is a historic event," said Brian Gardner, senior vice president at Washington Research, to MarketWatch.com. "It could be the biggest potential government bailout of a generation, much bigger than the savings and loan crises of the 1980s."

 But Gardner was cautious about the cost of the takeover: "If the housing market stabilizes, the costs to the government will be on the lower side. If the trends continue with growing credit losses, and no stabilization, then you'll see a higher cost to the taxpayers."

Federal Reserve Chairman Ben Bernanke supported the move.

More from MSN Money

"These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," Bernanke said in a statement. "I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty."

"Effectively, the federal government has now become the nation's mortgage lender," Moody's Economy.com chief economist Mark Zandi told The Associated Press. "This takes a major financial threat off the table."

The mess has cost the financial sector more than $500 billion in losses and write-downs, according to statistics from Bloomberg.