Paulson said that the continued operations of Fannie and Freddie—which guarantee or own almost half of the home mortgages in the country—would be "central to the speed with which we emerge from this housing correction."
Paulson made his comments in a speech in New York in which he again sought to reassure Americans that despite the recent turmoil, the nation's banking system is fundamentally sound.
Treasury officials confirmed that bank examiners from both the Federal Reserve and the Office of the Comptroller are currently inspecting the books at both Fannie Mae and Freddie Mac. Paulson said in an interview published Tuesday in the New York Times that he believed the results of those examinations would provide an important signal of confidence for the markets.
Paulson spoke shortly before the Congressional Budget Office estimated that the cost of rescuing Fannie and Freddie could be $25 billion.
After a period of market turbulence in which fears grew about the fiscal soundness of both institutions, the administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and also to purchase stock in the two companies if needed. Paulson has stressed that the proposal is a backup effort that would be in effect for 18 months as a way to calm investor fears.
Critics have charged that the open-ended offer of support exposes taxpayers to billions of dollars of losses, however.
The administration and leaders in both the House and Senate have been in negotiations over the plan. Paulson predicted in his speech that Congress would "act to complete work on this legislation this week." The House is expected to vote on the support plan as part of a larger housing rescue package on either Wednesday or Thursday.
Paulson said that Fannie and Freddie have issued $5 trillion in debt and mortgage backed securities. Of that amount more than $3 trillion is held by U.S. financial institutions and over $1.5 trillion is held by foreign institutions, making the stabilization of the two companies essential to the global economy.
"Because of their size and scope, Fannie and Freddie's stability is critical to financial market stability," Paulson told an audience at the New York Public Library. "Investors in our nation and around the world need to know that we understand how important these institutions are to our capital markets broadly and to the U.S. economy."
The effort to provide support to the two mortgage giants follows the government's involvement in dealing with the near-collapse of Bear Stearns in March when the Federal Reserve provided a $30 billion loan to facilitate the sale of Bear Stearns to JPMorgan.
Financial markets calmed down after the Bear Stearns episode in March only to become more turbulent in recent weeks as worries increased about mounting losses at financial institutions due to bad mortgage loans.
Paulson cautioned that the country should expect "additional bumps in the road. We have been experiencing more bumps recently and until the housing market stabilizes further we should expect some continued stresses in our financial markets."
In an effort to reassure Americans about the safety of their bank deposits, Paulson said that even with the failure earlier this month of savings and loan IndyMac Bank, no money was lost on deposits insured by the Federal Deposit Insurance Corp., which insures accounts up to $100,000.
"No one has or will lose a penny of insured deposits," Paulson said. "The American people have every reason to remain confident that the U.S. banking system is sound."
Paulson noted that of the nearly 8,500 insured banks and thrifts in the country, 99 percent are considered well-capitalized, meaning that they have sufficient reserves to protect against losses on loans. He said the failure of one thrift and four commercial banks this year was "hardly comparable" to the period of the savings and loan crisis during the 1980s when there were an average of 255 failures per year.
--Reuters and AP contributed to this report.