updated 9/10/2007 1:56:50 PM ET 2007-09-10T17:56:50

Sen. Charles Schumer proposed Monday allowing two government-sponsored mortgage giants to take a bigger share of the home loan market to help stabilize the troubled mortgage industry.

The New York Democrat introduced legislation to temporarily allow Fannie Mae and Freddie Mac to spend about $145 billion or 10 percent more than current investment caps permit to fund new mortgages and refinance existing ones.

Allowing the mortgage firms to expand their share of the $10.4 trillion home-mortgage market would help “stem the rising tide of foreclosures that is about to hit the economy,” Schumer said in a prepared statement.

Under Schumer’s proposal, half of the $145 billion would have to go to refinance mortgages for borrowers who rates are scheduled to reset at higher level by year-end.

The Federal Deposit Insurance Corp. estimates 2.5 million mortgages given to borrowers with weak credit will reset at higher rates by the end of next year.  

While Fannie and Freddie both say lifting the caps would help ease the mortgage market’s troubles, the Bush administration has opposed the move, arguing that they could pose a threat to the financial system’s stability if their ability to assume new debt isn’t restrained and that government supervision of them should be tightened before the caps are increased.

Both companies are recovering from accounting scandals that emerged earlier this decade. Last month, the companies’ federal regulator rejected requests to ease the caps on mortgage loans or mortgage securities they can hold in their portfolios.

Fannie Mae’s holdings of mortgages and mortgage-backed securities are capped at $727.7 billion, while Freddie Mac’s are capped at $728.1 billion.

However, their share of the mortgage market has declined in recent years from about 80 percent of mortgage-backed securities issued in 2001 to 44 percent of those issued last year, according to government statistics that also include Ginnie Mae, a government agency that sells mortgage securities.

Schumer also proposed raising the individual limit for home mortgages that Fannie and Freddie are allowed to buy to $625,500 in expensive areas. That limit is now at $417,000, below the median home price in pricey areas along both coasts.

Congress created Freddie Mac in 1968 and Fannie Mae in 1936 to pump money into the mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale to investors.

Fannie Mae shares fell 17 cents to $62.36 in afternoon trading while Freddie Mac shares fell 52 cents to $58.80.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 2.43%
$30K home equity loan FICO 5.80%
$75K home equity loan FICO 4.54%
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Low Interest Cards 13.57%
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Source: Bankrate.com