Bloomberg reports Treasury Secretary Hank Paulson said he supports Fannie Mae (FNM) and Freddie Mac’s (FRE) efforts to raise more capital so that the two companies can become a “constructive force” in the economy.

The two stocks dropped approximately 20% yesterday after a report by a Lehman Brothers analyst said they may need to raise a combined $75 billion because of an accounting change. However, Paulson said today in prepared remarks that raising capital was a positive step, and will “strengthen their balance sheets and allow them to provide additional mortgage capital, as they balance their responsibilities to their mission and to their shareholders during this period of housing market adjustment.”

Paulson also applauded the efforts of the government to agree on legislation that would strengthen oversight on Fannie and Freddie. “It is the single most powerful step Congress can take this year to help our nation get through this housing correction,” he said.

Fannie and Freddie are the two largest sources of mortgage financing in the U.S.

See Professor Kevin Depew’s comments in DepewTube: Nationalizing Fannie and Freddie.

From the Bull Pen: The Paulson comments sparked a broad-based rally with stocks deeply in oversold territories. Bulls can enjoy the much needed relief taking into consideration the Proshares Ultra Dow30 (DDM).

From the Bear Cave: Did Paulson cure the markets with one prepared statement? Has anything changed for homebuilding stocks like Toll Brothers (TOL)? Bears can consider downside entry should that stock head into the $21-$22 range.