Fannie, Freddie eligible loans get $300,000-plus boost

By Patrick Rucker

WASHINGTON, Jan 24 (Reuters) - The size of home loans that may be bought or insured by Fannie Mae FNM.N, Freddie Mac FRE.N and the Federal Housing Administration would rise by more than $300,000 under an economic stimulus plan pitched by the U.S. House of Representatives.

Under the plan outlined Thursday, Fannie and Freddie would be permitted to invest in home loans valued as high as $729,750 for one year, while the FHA would be be permitted to indefinitely insure loans up to that level. Currently, Fannie Mae and Freddie Mac loans are capped at $417,000, while FHA loans may not exceed $367,000.

Since the summer, investors have shunned home loans that did not pass through Fannie Mae, Freddie Mac, or the FHA as they watched Wall Street firms take big losses on their risky home loan investments.

Fannie Mae and Freddie Mac are publicly trade companies that hold federal charters to nurture the nation's housing market, while the Federal Housing Administration, set up after the 1930s depression, helps borrowers win favorable loan terms by guaranteeing mortgage payments to lenders.

The government ties of all three enterprises have been appealing to investors as the housing market has been rocked by a spike in foreclosures.

LOWER COSTS EXPECTED

Proponents of reform say the new loan levels will draw investors back into the home loan market, resulting in lower costs for mortgage borrowing. In recent months, the interest rate on high-cost loans has been about 1 percentage point above that for mortgages that could be financed by Fannie Mae and Freddie Mac.

Prospective home buyers in costly regions like California, Northern Virginia and New York have faced higher mortgage rates and tougher loan terms, and those areas would get relief under the plan, said Susan Wachter, a professor of real estate and finance at the Wharton School of the University of Pennsylvania.