UPDATE 4-Regulator, Treasury soothe Fannie, Freddie owners

(Recasts, adds Treasury Secretary, closes shares)

By Al Yoon and Patrick Rucker

NEW YORK/ARLINGTON, Va., July 8 (Reuters) - The regulator for Fannie Mae and Freddie Mac eased concerns about a mammoth capital shortfall on Tuesday, while the U.S. Treasury secretary underscored the importance of the housing finance giants to the nation.

The comments eased fears that an accounting rule change would require the companies to raise billions in fresh capital, sending their shares up about 12 percent. The rally reversed much of the losses sustained on Monday after investors saw an accounting threat weakening the companies already struggling with losses and pressures to support U.S. housing.

The plunge in the shares of Fannie Mae and Freddie Mac to 15-year lows on Monday led to a sell-off in U.S. stock markets, while the companies' debt costs rose to their highest level in several months.

Fannie Mae and Freddie Mac are considered critical to lifting the U.S. housing market out of its worst slump since the Great Depression, and their regulator said he did not plan to let an accounting rule disrupt that work.

"An accounting change should not drive a capital change," said James Lockhart, director of the Office of Federal Housing Enterprise Oversight.

Market analysts have argued that Fannie Mae and Freddie Mac could be pushed toward the tougher accounting treatment of their securitized assets and so be forced to raise a combined $75 billion in capital, but Lockhart said flatly that he has no interest in taking such a step. Accounting rules are set by the Financial Accounting Standards Board.

"I think it would be very strange for a regulator to let an accounting principle drive a capital decision," Lockhart told reporters in the wings of a conference about low-income mortgage lending.

He also said the companies' drubbing in the market on Monday was undeserved.

"If you look at the financials of these two companies, how they are prudently growing their books of business ... it was hard to imagine what happened yesterday," he said.

Investors were aslo heartened after Treasury Secretary Henry Paulson and a chorus of Wall Street analysts stressed the importance of Fannie Mae and Freddie Mac to the U.S. economy. Comments by Paulson, who said the government-sponsored enterprises played a vital role, to investors suggested the government would stand behind the companies.

Funding from the GSEs has become crucial since last summer as the credit crisis dried up money available to many lenders. The fallout from the lack of liquidity intensified on Monday as IndyMac Bancorp Inc IMB.N -- one of the largest U.S. mortgage lenders -- said it would stop making most home loans after regulators concluded it was no longer "well capitalized."

CRISIS OF CONFIDENCE

After Monday's freefall, many analysts said the worries about capital were overblown. OFHEO, not the accounting board, will set capital requirements for the GSEs, analysts at JPMorgan Chase & Co. and Keefe, Bruyette & Woods said in research notes.

Shares of Fannie Mae rose 11.9 percent while the stock of Freddie Mac climbed 13.0 percent on Tuesday.

People have been "spinning these horror scenarios," said David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management, one of the largest holders of Fannie Mae and Freddie Mac. "If Fannie Mae and Freddie Mac went under, that would be a sign that the whole mortgage market would collapse. The administration and the Fed realizes that they really need the GSEs out there."

Since November, both companies have raised billions in fresh capital to offset losses on bad mortgages and increase their mortgage holdings at a swifter pace.

Accounting rule makers are considering a move that could force companies to account for securitized assets, such as mortgage-backed securities, on their balance sheets. A strict reading of that rule would force Fannie Mae and Freddie Mac to raise capital to support trillions in mortgage-backed securities, but the companies are likely to get an exemption, according to Lehman Brothers.

Analysts expect the companies will have to raise more capital with preferred and common stock, diluting the value of existing shares.

That speculation has been exacerbated by regulators and lawmakers who have been pressuring the companies to raise capital for use in stabilizing the housing market that has worsened the U.S. economic slowdown.

Investors and analysts, meanwhile, said the companies' short-term fate is cloudy but that their long-term prospects are good since Fannie Mae and Freddie Mac hold federal charters to promote affordable housing. New business includes higher quality assets guaranteed at higher fees, Dreman said. (Editing by Leslie Adler)