Think we’ve seen the bottom of this ugly pit?  Think again.  The federal government is taking the wholly unprecedented step of seizing control of Fannie Mae & Freddie Mac.

Fannie Mae and Freddie Mac are expected to be taken over by the government as soon as this weekend in a bold move designed to protect the mortgage market from the risk the companies could fail, a person briefed on the matter said Friday night.

Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.

Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies’ chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government’s plan to take over the troubled companies in a process known as conservatorship.

Nothing to see here folks!  Move along!  This is all according to plan!

Well I guess it’s been long enough since the S&L crisis that we needed another catastrophe caused by a healthy dose of Republican deregulation.  Both mortgage giants have taken huge hits so far this year, and we know the cause–sub-prime loans gone bad.

That confirmed what investors saw in Fannie and Freddie’s recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.

Fannie Mae and Freddie Mac, the nation’s largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.

While both companies say they have enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.

The two federally backed financial giants hold or guarantee almost half of the nation’s total mortgage debt–a whopping $5 trillion.  This could get very ugly, very quick.