March 28 (Bloomberg) -- Fannie Mae and Freddie Mac, the U.S. government-chartered mortgage companies, may raise as much as $20 billion in capital as part of an agreement that allows them to buy more debt securities, their regulator said.

``That's the top end of the range,'' James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said in an interview in Washington yesterday. While ``there's no specific number'' that was agreed upon, the companies and Ofheo discussed ballpark figures, he said.

Fannie Mae and Freddie Mac must raise the money before Ofheo approves any further reduction in the capital they need to guard against losses on their combined $5 trillion of mortgage investments, Lockhart said. Ofheo agreed last week to lower their capital threshold to 20 percent from 30 percent, enabling the companies to buy as much as $200 billion in securities backed by home loans and help prop up the housing market.

The capital surcharge is one of the last remaining restrictions imposed on the companies after $11.3 billion of accounting misstatements. Ofheo had required the companies to increase their capital cushion to 30 percent more than normally required to ensure they were protected against losses.

``There's no specific number,'' Lockhart said. ``There was a range of numbers. The best way is to say it's significant.''

`Much More?'

Freddie Mac Chief Executive Officer Richard Syron disputed Lockhart's estimate that the companies will have to raise ``much more'' than the $5.9 billion of capital released by reducing the cushion, Lockhart said.

``Freddie Mac's understanding of the joint statement is that any additional capital raised would be consistent with the dollar amount'' of the capital reduction, Syron said in an e-mailed statement.

Fannie Mae, based in Washington, raised $7 billion in December by selling preferred stock. McLean, Virginia-based Freddie Mac sold $6 billion a month earlier. The companies will need to raise the capital ``sooner rather than later,'' Lockhart said.

The companies didn't say last week how or when they would raise the additional capital. Fannie Mae spokesman Brian Faith didn't immediately return a call seeking comment.

Capital raisings of $10 billion each would be more than investors were anticipating and will be a ``disappointment'' for stockholders, Credit Suisse analyst Moshe Orenbuch, who is based in New York, said today in a research note.

Dilution

The companies ``will need to maintain capital above the minimums, increasing the near-term dilution to equity holders,'' Orenbuch said.

Fannie Mae fell $1.95, or 7 percent, to $26.02 in New York Stock Exchange composite trading. The stock is down 35 percent this year. Freddie Mac, down 25 percent in 2008, dropped $1.63 to $25.45.

The shares soared more than 50 percent last week after Ofheo reduced the capital requirements on optimism that the increased freedom may help propel growth at the companies.

Investors were too optimistic, on the company's profit potential, Orenbuch said. Freddie Mac may have losses of as much as $5 billion in the first half of this year, Orenbuch said.

``The fact that they would have to raise more capital got lost in all the excitement,'' said Paul Miller, an analyst at Friedman Billings Ramsey in Arlington, Virginia.

Common or Preferred

The capital may either be in common shares, preferred shares or convertible preferred shares, Lockhart said. The companies can also bolster capital by cutting their dividends a second time, Miller said.

``I expect the companies to determine the amount within a broad range based upon mortgage market needs, the expected return to their shareholders and the advice they receive from investment bankers,'' Lockhart said in a statement sent by e-mail today.

Fannie Mae and Freddie Mac were created by Congress to boost homeownership. They profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They are required to set capital aside to absorb any losses on those mortgages.

The companies have increased their market share to 76 percent of new U.S. mortgages, about double their share of 2006, Lockhart said. That gain shows why they need a stronger regulator, he said.

Every Resort

``The two enterprises have effectively become the mortgage market at this point,'' Lockhart said. ``Effectively they have become the lender of first, last and every resort.''

Fannie Mae and Freddie Mac have said they were limited in how much assistance they could offer amid regulatory limits and rising losses. Fannie Mae posted a record $3.55 billion fourth- quarter loss as rising foreclosures sent credit costs soaring. Freddie Mac reported a record $2.45 billion net loss for the period.

The Bush administration, trying to stem the mortgage crisis, has gradually eased constraints on Fannie Mae and Freddie Mac. Congress lifted a ceiling on the companies' mortgage assets and raised a limit on the loans they buy to $729,750 from $417,000 in some counties.

The requirements were eased on Freddie Mac even though the company hasn't met all stipulations in a consent order issued against the company after its accounting misstatements. Freddie Mac is yet to split the roles of chairman and chief executive officer and hasn't registered with the Securities and Exchange Commission as required.

Freddie Mac is likely to meet those demands by midyear, Lockhart said. The company also has a search under way for a CEO to replace Syron, Lockhart said.

``They are well on their way to replacing the CEO,'' Lockhart said. ``They have a search under way, so they're making good progress on that. And there will be a splitting of the duties come summer.

``We felt at this point it was important to add liquidity to the mortgage market.''

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: March 28, 2008 16:30 EDT