Fannie Mae (FNM) and Freddie Mac (FRE) won't need congressional approval to assist with an Obama administration initiative to refinance millions of borrowers who owe more than 80% of the value of their homes, the mortgage lenders' regulator said Friday.

Such assistance "would be a proper exercise of their existing authorities," the Federal Housing Finance Agency said in a statement.

The government charters for Fannie and Freddie expressly prohibit them from guaranteeing or buying mortgages with loan-to-value ratios above 80% unless the borrower has mortgage insurance or the loan originator retains 10% of the default risk.

But the Obama housing plan contemplates allowing borrowers with mortgages above the 80% loan-to-value threshold to refinance into another loan backed by Fannie or Freddie without purchasing mortgage insurance.

In a letter to a mortgage insurance industry trade group, FHFA Director James B. Lockhart argued that the program would be permissible under each firm's charter. Since Fannie and Freddie already own the risk of the loan, refinancing it won't increase the risk, he said.

"In fact, credit risk would be reduced because, after the refinance, the borrower would have a lower monthly payment and/or a more stable mortgage payment," Lockhart wrote in the letter to Mortgage Insurance Companies of America Executive Vice President Suzanne Hutchinson. The letter was released by the FHFA.

Lockhart gave assurances to the mortgage insurance industry, which has been capital-constrained, that the FHFA will play a role in the program. He said Fannie and Freddie would try to carry forward the existing mortgage insurance contract with the new loans. However, he said for borrowers whose original mortgage was below the 80% loan-to-value cut-off, but has now climbed above, no mortgage insurance would be required.

"Our goal is to ensure that the existing mortgage insurance continues at the same dollar amount and price as with the original loan," Lockhart wrote.

The administration's plan aims to allow homeowners who have seen their home value plummet to take advantage of low mortgage rates without adding additional costs in the form of mortgage insurance premiums.

The program is only open to homeowners with a mortgage held or guaranteed by Fannie or Freddie. Only mortgages with loan-to-value ratios of up to 105% would be eligible. The administration estimates that would help 4 million to 5 million people to refinance.

In his letter, Lockhart wrote that participating borrowers would be prohibited from taking cash out at refinancing, except for small amounts to cover closing costs and other related fees. He said the initiative would expire after June 10, 2010.

The mortgage insurance trade group praised Lockhart for underscoring that existing private mortgage insurance contracts would be generally continued under the program. "We commend Director Lockhart for offering this important clarification of the President's housing recovery program," MICA President Kevin D. Schneider said in a statement.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com