May 16 (Bloomberg) -- Fannie Mae, backing down from pressure from homeowner and real estate groups, will allow buyers in markets with falling home prices to purchase houses with 3 percent down payments, potentially increasing the company's risk.

The largest U.S. mortgage-finance provider fell in New York Stock Exchange composite trading as the announcement, combined with new legislation that may require Fannie Mae and Freddie Mac to fund a government mortgage program, demonstrated the extent of lawmakers' sway over their policies.

``It basically shows you that they have a public purpose mission that doesn't always help the shareholders,'' said Moshe Orenbuch, an analyst at Credit Suisse in New York, who has an ``underperform'' rating on Fannie Mae and Freddie Mac. ``All things being equal, lowering down payments in areas that have experienced declines in home prices has got to be more risky.''

Fannie Mae and Freddie Mac, created by Congress to increase mortgage financing and provide market stability, fulfill their mission by buying mortgages from lenders so banks have more cash to make new loans. The companies, adjusting to a rise in mortgage defaults, tightened loan standards to limit losses, introducing new fees to buy riskier loans and raising required credit scores.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said Fannie Mae went ``a little too far,'' and today's decision is a step in the right direction for the government-chartered company to continue its federal mission.

``They're clearly helping,'' Frank said in a telephone interview. ``For those who are negative about them, there's obviously this consensus that we have to use them more.''

Meeting Needs

The stricter down payment policy, adopted in December, will end June 1, Washington-based Fannie Mae said in a statement. Potential homeowners approved by the company's computer program will be able to borrow up to 97 percent of the value of the property, the company said. Other loans will be accepted with loan-to-value ratios of up to 95 percent. Previously, borrowers in areas such as parts of California, Nevada and Florida were required to put down 5 percent more equity than elsewhere.

Fannie Mae is eliminating financing of up to 100 percent in other areas, ending programs that targeted first-time buyers.

``We've been working on ways to meet the market's need to recover,'' Marianne Sullivan, Fannie Mae's senior vice president for single-family credit policy and risk management, said in a telephone interview.

Fannie Mae fell 34 cents to $29.89 today in New York Stock Exchange trading, and is down 25 percent this year. Freddie Mac declined 30 cents to $26.97 today and 21 percent year-to-date.

Regulators

Fannie Mae and McLean, Virginia-based Freddie Mac, which own or guarantee more than 40 percent of the $12 trillion in U.S. residential mortgage debt, profit by holding mortgage assets that yield more than their debt costs, and from fees charged to guarantee bonds they create.

The two companies are so large and so highly leveraged that they are a ``point of vulnerability'' to the U.S. financial system and could pose a risk to taxpayers, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said in a speech in Chicago today.

More than 80 housing advocates, mostly small community groups, sent letters to executives last month asking for the stricter loan policies to be withdrawn.

Both companies tightened loan terms ``a little too much,'' potentially exacerbating problems, Lockhart told reporters after the speech. ``Now they're loosening them, but they're doing it in a very controlled, and I think, good manner.''

The Senate Banking Committee tentatively agreed yesterday on an anti-foreclosure measure that would have Fannie Mae and Freddie Mac foot part of the bill for a federal program to insure mortgages for struggling borrowers.

MGIC, PMI

Borrowers in declining markets may still find it hard to obtain loans with low down payments because they will need to find mortgage insurers to accept them, said Brian Simon, senior vice president at Mount Laurel, New Jersey-based mortgage bank Freedom Mortgage Corp.

Fannie Mae and rival Freddie Mac are required by law to have borrowers who want to put less than 20 percent down obtain mortgage insurance from companies such as MGIC Investment Corp., Radian Group Inc. and PMI Group Inc., which have been tightening policies.

Milwaukee-based MGIC, the largest mortgage insurer, has implemented policies that restrict loan-to-value ratios in bad markets to 95 percent for borrowers with at least 680 credit scores, and to 90 percent from borrowers with scores between 620 and 680, Katie Monfre, a spokeswoman, said. In March, it stopped insuring loans with nothing down, raising its minimum to 3 percent. Monfre declined to comment on Fannie Mae's changes.

``Our declining markets' policy maxes out at 95 percent,'' Rick Gillespie, a spokesman for Philadelphia-based Radian, said. ``I don't think we're planning on making any changes to that at this time.''

PMI spokesman Nate Purpura declined to comment, except to say the company limits loan-to-value ratios to 90 percent in declining markets.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: May 16, 2008 16:42 EDT