US mortgage rate freeze not good idea -OFHEO chief

WASHINGTON (Reuters) - There are signs of improvement in U.S. housing markets but the idea of freezing mortgage rates would be a mistake, the director of the Office of Federal Housing Enterprise Oversight said on Friday.

"You'd really cause market dislocations," said OFHEO director James Lockhart on CNBC television, when asked about a proposal put forward by Sen. Hillary Clinton, a contender for the Democratic presidential nomination.

"I think we're going to let the market work and interest rates have come down dramatically and people are going to be able to refinance," Lockhart said.

He said lower interest rates should make it somewhat less painful for holders of adjustable-rate mortgages who face "resets" to higher rates in coming months.

Lockhart said there were "some good signs" that the severe downturn in U.S. housing markets might be approaching an end, although he said it will take some months to be sure.

"It's going to take a while but we're starting to see some bottoms," Lockhart said, referring to a prolonged dip in construction starts on new homes. "It may take another six months or so but hopefully we'll start pulling out of it."

He said that government-sponsored enterprises Fannie Mae (FNM.N) and Freddie Mac (FRE.N) were taking steps that should help keep mortgage rates lower. Regulators eased capital requirements for the two biggest U.S. mortgage finance sources so they can provide more funds for stressed mortgage markets.

"Fannie and Freddie are doing billions and billions a month refinancing people out of subprime mortgages and I think that is the way to go," Lockhart said.

In response to questions, Lockhart said he supported the idea of consolidating the regulation of Wall Street investment banks and other financial market participants that have come under criticism as credit markets have come near seizing up.

"I think that's a good idea," he said, adding Fannie Mae and Freddie Mac need a strong regulator as they keep growing.

One reason they need to be strongly regulated is to prevent the possibility that, should they get in trouble, they could cause problems for the whole financial system.

"Systemic risk is a big issue with these two companies. When you have 76 percent market share in just two companies, obviously they are the system," Lockhart said, calling that "a key reason" for legislative action to tighten regulation.

(Reporting by Glenn Somerville; Editing by James Dalgleish)