* Watt emphasizes mortgage liquidity in first public speech
* Won't lower cap on size of loans Fannie, Freddie can back
* Steps taken to cut risk banks might have to buy back loans
* Detroit program will allow for "deeper" loan modifications (Adds Breakingviews link)
By Margaret Chadbourn
WASHINGTON, May 13 (Reuters) - The regulator of Fannie Mae and Freddie Mac laid out plans for the government-run companies on Tuesday that could make it easier for Americans to obtain mortgages, marking a sharp departure from a predecessor who wanted to aggressively shrink their role in the housing finance market.
Federal Housing Finance Agency Director Mel Watt, in his first public speech since taking office in early January, said he would hold off on a proposed reduction in the size of loans the firms can buy, and added he was jettisoning plans to reduce the financing they provide for apartment building loans.
He also said the two companies, which own or guarantee about 60 percent of all U.S. home loans, would ease standards that govern when banks must buy back faulty loans from them, which could also help open the credit taps.
"I don't think it's FHFA's role to contract the footprint of Fannie and Freddie," Watt said at an event sponsored by the Brookings Institution. "Our overriding objective is to ensure that there is broad liquidity in the housing finance market and to do so in a way that is safe and sound."
The Senate Banking Committee will consider a bill on Thursday to replace Fannie Mae and Freddie Mac with an industry-financed government mortgage reinsurer, but the likelihood of any legislation becoming law soon is slim, leaving the regulator with power to direct the firms.
Watt said he did not see it as his role to weigh in on the debate.
Both Watt's predecessor, Edward DeMarco, and the Obama administration favored cutting the size of so-called conforming loans as a way to make room for more private capital. But housing industry groups had warned the step could undercut a market that already appears to be flagging.
Federal Reserve Chair Janet Yellen said last week there was a risk a protracted housing slowdown could undermine hopes for stronger economic growth this year.
"FHFA will not use its authority as conservator to reduce current loan limits," Watt said. "This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market."
Some investors saw the shift as making it more likely the bailed-out companies, which lawmakers and the Obama administration want to shut down eventually, would ultimately survive. Their common stock shot up more than 11 percent in early trading to around $4.70 a share. If the companies are wound down, the stock would likely be worthless.
Investors also seemed heartened by Watt's decision to not force Fannie Mae and Freddie Mac to pull back support for multi-family housing. The PHLX Housing Index of homebuilders ticked up 0.7 percent, with several major builders, including PulteGroup, Lennar and KB Home all rallying.
HELPING AT THE MARGINS
In easing rules that govern when banks are required to repurchase faulty mortgages they sold to the two companies, Watt took aim at a risk that lenders cite for the still-tight credit that has hindered the housing recovery.
Watt said Fannie Mae and Freddie Mac, which buy mortgages and package them into securities they issue with a guarantee, would expand the universe of loans exempt from repurchase requests in part by relaxing mortgage payment history requirements.
"While none of his actions will solve the mortgage credit crunch. They all will help at the margins," said Jaret Seiberg, a senior policy analyst at Guggenheim Securities. "The path Watt has laid out is positive for mortgage originators, mortgage insurers and homebuilders."
DeMarco earned a reputation as a staunch protector of the taxpayers who bailed out Fannie Mae and Freddie Mac with $187.5 billion, but housing advocates felt he did not do enough to help Americans whose home values plummeted when the U.S. housing bubble burst.
Watt said his agency had no plans to cut mortgage principal for borrowers whose homes were now worth less than their mortgages, but he said that did not necessarily mean FHFA was "not considering it."
He also announced a pilot program in Detroit that would permit extended loan modifications than available under a program that helps so-called underwater borrowers refinance loans. He said the FHFA hoped to expand the program nationwide. (Reporting by Margaret Chadbourn; Editing by Andrea Ricci and Andre Grenon)