UPDATE 4-US Home Loan Banks allowed to lift MBS holdings

(Recasts throughout, adds analyst comment, market reaction)

By Patrick Rucker

WASHINGTON, March 24 (Reuters) - Regional U.S. banks will be allowed to temporarily boost holdings of mortgage-backed securities by some $150 billion in another bid by regulators to bring stability to troubled mortgage markets.

The move announced on Monday by the Federal Housing Finance Board enables the banks in the Federal Home Loan Bank system to expand their holdings of securities issued by Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac(FRE.N: Quote, Profile, Research), the congressionally chartered companies that are the two biggest U.S. home financing providers.

Regulators have made a series of moves to ease strains in U.S. mortgage markets where a rising tide of foreclosures has made lenders so wary that it has threatened to dry up funding.

Just last Wednesday, the regulator for Fannie Mae and Freddie Mac eased their capital requirements, allowing them to pump another $200 billion into distressed mortgage markets with purchases of mortgages and mortgage securities.

The Federal Housing Finance Board on Monday voted to let the banks immediately use existing capital to increase their holdings of mortgage-backed securities issued by Fannie and Freddie, or agency MBS, for two years.

The $4.5 trillion market for agency MBS is the cornerstone of the entire mortgage market and had shown signs of cracking until signs of federal support appeared.

"Without a functioning mortgage market, you can't get out of the mortgage mess," said Walter Schmidt, head of mortgage bond strategy at FTN Financial in Chicago. "It seems like the government is doing what it can."