UPDATE 2-Fed's Kroszner: parts of mortgage market stalled

(Adds details from Q&A, context, byline, changes dateline, previous WASHINGTON)

By Scott Malone

NEWTON, Mass, June 6 (Reuters) - Strains in financial markets have eased somewhat but the bundling of mortgages into securities by Wall Street firms is stagnant and will recover only gradually, Federal Reserve Governor Randall Kroszner said on Friday.

Kroszner said additional capital raising by financial institutions would support lending to households and businesses, which would boost the economy.

"Strains continue to result in restrictive conditions for home-mortgage borrowers," Kroszner said at a finance conference hosted by Boston College.

Investors will only buy bundles of the smaller mortgages that conform to the standards of government-sponsored housing finance companies such as Fannie Mae, Kroszner said, preventing lenders from freeing up capital by selling their largest home loans.

"New originations are being held in lenders' portfolios, pressuring their balance sheets and, for example, leaving the spread between interest rates offered on jumbo and conforming mortgages very high," he said.

Difficult conditions in mortgage securitization markets put strains on the housing market itself, Kroszner said.

Kroszner said housing markets will recover only slowly because of large numbers of unsold homes in parts of the country.