WASHINGTON – Feb. 28, 2008 – The federal regulator for Fannie Mae and Freddie Mac said Wednesday it would lift restrictions later this week on the amount of mortgages the government-sponsored companies can hold on their books.

Shares of Fannie and Freddie rose even after Fannie reported a nearly $3.6 billion loss in the fourth quarter of 2007 amid rising home-loan delinquencies.

The Office of Federal Housing Enterprise Oversight, acting after Fannie Mae published audited financial results for 2007 on Wednesday morning, said the two companies’ mortgage investment limits, currently at around a combined $1.5 billion, would be lifted effective Saturday. Freddie Mac is due to report is financial results on Thursday.

The caps were imposed in 2006 in response to the companies’ multibillion-dollar accounting lapses, thereby limiting their participation in the market for securities backed by home mortgages.

James B. Lockhart, director of OFHEO, said in a statement that the filings are “an important milestone in remediation of their respective operational and control weaknesses that led to multi-year periods when neither company released timely, audited financial statements.”

Last fall, Democratic lawmakers had urged the government to lift those limits as a way to ease mortgage-market turmoil. Regulators allowed an increase, but it was smaller than those lawmakers advocated.

The government, however, did not lift a government mandate that requires Fannie and Freddie to keep reserves to guard against losses of 30 percent above the minimum legal requirement.

Lockhart said he will discuss with Fannie and Freddie a “gradual decreasing” of that requirement. But he noted that it has put the two companies in a better position to cope with “volatile market conditions and (Fannie and Freddie’s) significant losses.”

Fannie Mae on Wednesday said it lost nearly $3.6 billion in the fourth quarter of 2007 as home-loan delinquencies mounted and the company preserved cash in anticipation of further losses. The quarterly loss at Fannie, the largest U.S. buyer and backer of home loans, contrasts with a profit of $604 million in the same period a year earlier.

Copyright © 2008 The Associated Press, Alan Zibel (AP Business Writer). All rights reserved. This material may not be published, broadcast, rewritten or redistributed.