Washington unveils policy to help people get foreclosed homes back

(Adds comment by economist, background)

WASHINGTON, Nov 25 (Reuters) - Americans who lost their homes to foreclosure will be able to buy them back at current market value if the properties are owned by housing finance giants Fannie Mae and Freddie Mac, the regulator of the two firms said on Tuesday.

Previously, the Federal Housing Finance Agency required the two firms to demand former homeowners pay the entire amount owed on the mortgage.

The FHFA said the new rule applies to about 121,000 properties currently owned by Fannie Mae and Freddie Mac, which guarantee most new U.S. mortgages and were bailed out by taxpayers in 2008 during a severe recession.

"This is a targeted, but important policy change that should help reduce property vacancies and stabilize home values and neighborhoods," FHFA Director Mel Watt said in a statement.

Watt has so far shied away from policies that would reduce the debts of Americans who owe more on their mortgages than the properties are worth, and Tuesday's action could signal more openness to that approach.

"It is sort of an end-run way to do principal reduction," said Richard Green, a housing economist at the University of Southern California.

Democratic lawmakers like Senator Elizabeth Warren have urged the FHFA to adopt principal reduction policies to help more people avoid foreclosure. But critics of this approach say it could encourage people to borrow too much in the first place or put undue stress on banks.

The FHFA said people who lost their homes must still wait at least three years after a foreclosure to be eligible for a loan backed by Fannie Mae or Freddie Mac.

(Reporting by Jason Lange; Editing by Andrea Ricci)