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Washington could cut Fannie, Freddie home loan limits

The Fannie Mae headquarters is seen in Washington November 7, 2013. REUTERS/Gary Cameron

WASHINGTON (Reuters) - The U.S. government could reduce its support for high-cost mortgages as soon as October of next year, a top regulator said on Monday in a statement that amounted to a show of confidence in the housing recovery.

The regulator for taxpayer-owned Fannie Mae (FNMA) and Freddie Mac (FMCC) unveiled a plan in which the two mortgage finance giants would have to gradually reduce the maximum size of U.S. home loans they can buy.

Because the government guarantees the loans bought by the two firms, the move would dial back the heavy support Washington provides the mortgage market.

"Setting reduced loan purchase limits furthers the goal of contracting the market presence of Fannie Mae and Freddie Mac gradually over time," the Federal Housing Finance Agency said in a statement.

The FHFA said it could reduce the loan limit to $600,000 from $625,500 in the nation's highest-cost areas, which include cities like Los Angeles, New York and Washington. The limit would drop in much of the rest of the country to $400,000 from $417,000.

The regulator said it will seek public comment before implementing the plan. If adopted, the plan "will not affect loans originated before October 1, 2014," the FHFA said.

The U.S. housing market imploded during the 2007-2009 recession but has turned a corner over the last year, supported by the Federal Reserve's low interest rate policies and by a taxpayer backstop for most of the mortgage market.

The loan limits were raised in 2008 to help keep the market liquid during the financial crisis, and the regulator had begun to consider lowering them as the housing market recovered as a way to open up more space for private capital.

Some housing industry leaders and lawmakers have expressed concern that reducing the limits could shut out buyers and impede the housing recovery. Investors might not be willing to take the risk of buying mortgage-backed securities without a government guarantee, they have cautioned.

But Washington appears generally uneasy with its massive footprint in the housing market. The regulator noted in its statement that President Barack Obama had asked it to reduce the loan limits.

The FHFA said it was seeking public input on its proposal that "will inform its decision-making and ensure any change minimizes market disruptions."

Fannie Mae and Freddie Mac, which were seized by the government at the height of the financial crisis, do not make loans. They purchase mortgages from lenders, which they either keep on their books or bundle into securities that they offer to investors with a guarantee. They currently back about two-thirds of new U.S. home loans.

(Reporting by Jason Lange; Editing by Dan Grebler and David Gregorio)