WASHINGTON (Reuters) - The regulator of Fannie Mae and Freddie Mac on Wednesday eased capital requirements for the two biggest housing finance agencies, allowing them to pump up to $200 billion into the distressed U.S. mortgage market.

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The regulator, the Office of Federal Housing Enterprise Oversight, said it was lowering to 20 percent from 30 percent the amount of extra capital the companies are required to hold. It will also consider further reductions. The 30 percent requirement had been imposed after the discovery of lax accounting and risk controls earlier this decade.

In addition, the companies will begin to raise “significant capital,” OFHEO said in a joint statement with Fannie Mae and Freddie Mac. Last year, the companies sold nearly $14 billion in preferred stock.

The extra $200 billion would allow Fannie Mae and Freddie Mac to purchase both existing mortgage-backed securities and new home loans originated by banks. It could also enable them to increase their business of guaranteeing mortgages, a key to helping pull the U.S. housing market out of its funk.

“It’s good news,” said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi in New York. “A lot of mortgage originators have left the business, so it’s a good thing that mortgage money will be made more available.”

The move is a shift for the Bush administration, which has long argued the combined $1.4 trillion portfolio of the companies represents more of a risk to the U.S. financial system than a help to homeowners. The new policy comes as falling home prices and increasingly jittery financial markets have pushed the U.S. economy to the verge of recession.

After the announcement, shares of Fannie Mae and Freddie Mac rose sharply for a second day. Fannie Mae stock rose 10.5 percent to $31.17, a five-week high, while Freddie Mac jumped 8.3 percent to $28.18, the highest since February 20.

FULL COMPLIANCE

The regulator said Fannie Mae was in “full compliance” with government restrictions placed on the company for accounting violations, while Freddie Mac had to clear one more hurdle relating to the separation of the roles of the chairman and chief executive.

Freddie Mac has already said it is splitting what had been a co-chief executive/chairman job and was currently searching for a new chief executive.

The regulator said it expects to remove special regulatory constraints placed on the companies after the book-keeping scandals, which came to light for Freddie Mac in mid-2003 and in 2004 for Fannie Mae.

Increased investment by Fannie Mae and Freddie Mac is expected to bolster confidence in a secondary mortgage market shaken by a wave of failing home loans. Cratering prices and a sell-off of mortgage-related assets this year have fueled an escalating credit crunch that may have already tipped the U.S. economy into recession.

Mortgage-backed securities issued by Fannie Mae and Freddie Mac rallied, pushing their yield spreads to government debt to their tightest since February -- indicating a perception of falling risk. Fannie Mae and Freddie Mac are the biggest buyers in the $4.5 trillion “agency” mortgage-backed securities market.

The government-sponsored enterprises have been surprised by the magnitude of the housing slump, raising questions of how much risk they can take with the capital, analysts said. Both companies boosted forecasts for credit-related losses through 2009 after reporting combined net losses of more than $6 billion for the fourth quarter.