NEW YORK (CNNMoney.com) -- An additional $200 billion in financing is headed to the battered mortgage markets after federal regulators Wednesday said they would allow finance giants Fannie Mae and Freddie Mac to reduce the capital they keep on hand.

The move is the latest attempt by policymakers to ease the housing crisis, although it raises risks faced by two government-sponsored firms that are crucial to the functioning of global financial markets.

The rule change was announced by the Office of Federal Housing Enterprise Oversight, (OFHEO), a normally low-profile agency that sets rules for the two government sponsored companies that between them hold or guarantee nearly $5 trillion in mortgages.

Fannie (FNM) and Freddie (FRE, Fortune 500) are two publicly-traded companies set up by the federal government nearly 40 years ago to help provide financing needed by lenders looking to make home loans. With the change, they are expected to buy or guarantee $2 trillion in mortgages. That is about $200 billion more than they would have without the rule changes announced Wednesday.

Kieran Quinn, the chairman of the Mortgage Bankers Association, said the new rules are a crucial step in reestablishing the pipeline of funds that flow from investors through lenders to those buying a home or refinancing a mortgage.

"This will enhance lenders' ability to offer financing to a wide variety of borrowers," said Quinn. "This should help keep some at-risk borrowers in their homes which will help stabilize the real estate market."

Relief for troubled markets

Both firms have been working in recent years to clean up accounting problems. During that process, OFHEO has been requiring them to keep 30% extra capital in reserve. The rule change allows them to reduce that excess capital to only 20%.

Even as the market for mortgage-backed securities has melted down over the past year, the securities backed by the so-called conforming loans that met Freddie and Fannie criteria were considered the gold standard.

By the fourth quarter of 2007, the two firms between them were responsible for nearly three-quarters of mortgage backed securities on the market.

But the loans that backed those securities could not be made to borrowers who had less than top credit scores, did not have significant equity in their home or needed loans for more than $417,000.

Congress recently raised the limits for the loans that Fannie and Freddie can buy or insure up to $729,750, increasing the risks for the firm and the demands on their capital.

The new loan rules were seen as a necessary step to end the credit squeeze that has hammered home values across the nation and caused billions in losses and writedowns on Wall Street, raising the risk of a recession.

Change in thinking

The lower capital limits are important, not just for the additional $200 billion they make available, but for the change of thinking it signals in the Bush administration, said Jaret Seiberg, financial services analyst for policy research firm Stanford Group.

"The psychology is quite critical here," said Seiberg. "There is now an increasing view in the market that the administration understands the seriousness of the crisis and is willing to take steps it previously dismissed."

In recent weeks, Wall Street's appetite for mortgage-backed securities insured by Fannie and Freddie started to wane. That weakening demand helped force mortgage rates higher than they would have been.

"That showed that investors were starting to get nervous," said Seiberg. "That could have had a devastating impact on not just the mortgage market but the economy. Any step to make sure that market remains liquid is an important one."

But there are risks involved in Fannie and Freddie lowering their capital reserves and in buying larger loans. If problems in the housing and mortgage markets continue to deepen, it could in the worst case scenario lead to a federal government bailout of Fannie and Freddie. Seiberg believes that's a risk worth taking given the need to inject more cash into the market.

"There's a trade off when you lower capital levels, you take on more risk," said Seiberg. "That's unavoidable. The question going forward is whether Freddie and Fannie can manage that risk."

But some argued the risks are not worth it and this was the wrong move. "In truth, both Fannie and Freddie are already in a more precarious position than politicians or investors would like to admit," said Peter Schiff, president of Euro Pacific Capital, a brokerage firm focusing on overseas investments.

"Lowering reserve requirements is simply an irresponsible attempt to postpone the pain of falling home prices, but it will simply result in greater indebtedness and a deeper recession."

OFHEO Director James Lockhart said in a statement he was confident that both firms have resolved their accounting issues enough to allow the agency to lower its previous capital requirements. He pointed out that as part of this initiative, both companies announced that they will begin the process to raise significant additional capital.

"Let me be clear - both companies have prudent cushions above the OFHEO-directed capital requirements and have increased their reserves," he said. "We believe they can play an even more positive role in providing the stability and liquidity the markets need right now."

Fannie Mae CEO Daniel Mudd said while the rules changes are not a complete solution for the embattled housing and home loan markets, he believes it will help, even though the two firms will continue to focus on prime loans to borrowers with good credit and a large amount of equity in their homes.

"We hope it will help restart the housing engine that powers our economy," he said.