CONDEMNED!

Like a California wildfire, yesterday’s meltdown of Freddie Mac and Fannie Mae nearly spread uncontrolled across Wall Street.

The future of the nation’s already reeling mortgage industry was thrown into chaos after the two government-sponsored mortgage giants saw their shares sink as much as 50 percent amid fears that they’re facing financial collapse.

The growing panic on Wall Street grew so intense that at one point the stock market sank 251 points, and helped the Dow Jones industrial average briefly dip below the 11,000 level for the first time in two years.

However, by the end of the day, both the Dow and the two companies’ shares had recovered from their lows, thanks in part to soothing comments from Treasury Secretary Hank Paulson as well as a rescue rumor that turned out to be false.

As government-sponsored enterprises, both Freddie and Fannie enjoy the benefits of being private companies while at the same time carrying an implicit guarantee from the federal government that enables them to borrow more cheaply.

The feds aren’t explicitly obligated to step in when there’s trouble.

However, should they implode, it would make the Bear Stearns collapse look like a cakewalk as the pair help guarantee more than $5 trillion in mortgage debt – equivalent to about 70 percent of all mortgages originated in the US.

Early in the day, Paulson calmed the markets when he suggested the federal government would be willing to step in and take over the two companies if they continued to flounder.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said. However, he made clear that a takeover was not imminent – which buoyed shareholders, who would see their equity wiped out in a Fed seizure.

Later in the day a rumor surfaced that the Federal Reserve, in a bid to stabilize Freddie and Fannie, would provide access to the short-term borrowing window.

Though a Fed spokeswoman later denied that such a rescue was taking place, the chatter was enough to breathe life into the companies’ stock and the Dow.

Freddie closed at $7.75, down 3.1 percent, and Fannie Mae shed 22 percent, ending the day at $10.25.

The Dow closed down 128.48 to 11,100.54. The Nasdaq slipped 18.77 to 2,239.08.

So far, Fannie and Freddie have lost more than $11 billion on mortgages as the housing market has deteriorated. But they also have raised about $20 billion in equity over the past several months in preparation for continued losses on mortgages. Still, analysts believe that Fannie and Freddie need to raise tens of billions more to protect themselves.

Spokespeople for both Fannie and Freddie have stated publicly that they have sufficient capital.

However, the anxiety that Wall Street has about the fate of the two firms hasn’t let up.

“It would be nice if someone would admit that these firms are not well capitalized and we have a problem as a result,” said Joshua Rosner, managing director at Graham Fisher & Co. “This isn’t Bear Stearns. You’re talking about a potentially massive hit to the taxpayers.”