Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told Congress on Thursday they are open to letting Fannie Mae and Freddie Mac buy more troubled home loans if the companies control risk and agree to tougher oversight.

Bernanke and Paulson have both resisted letting the two mortgage finance companies expand their presence in the mortgage market, but on Thursday they said they could envision terms under which the two companies could help stabilize the market.

Paulson said he could support letting the government-sponsored enterprises, or GSEs, temporarily invest in so-called jumbo loans that are above their current $417,000 limit as part of a broader regulatory overhaul.

"There is little question that allowing the GSEs to securitize jumbo mortgages would give a short-term lift, which would be helpful to a segment of the housing market," Paulson told the House of Representatives Financial Services Committee.

The two companies, supported by congressional allies, want to have more freedom to invest in jumbo loans.

On Wednesday, the regulator for Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, loosened some limits on the companies' investment holdings, which are valued at $1.4 trillion.

Rep. Barney Frank, chairman of the Financial Services Committee, said OFHEO's action "was not a sufficient response" and constraints on the two companies should be loosened.

Frank and the companies' other congressional allies have suggested that lifting the cap on GSE investment holdings and raising the loan limit size could help stabilize the mortgage market. A spike in late payments and home foreclosures in recent months has drained financing from the home loan sector.

Bernanke warned that lifting the companies' loan limit could expose investors and the GSEs to greater risk and said that if such a move is taken, it should be taken swiftly and only on a temporary basis.

"If ... the Congress were inclined to move in this direction, it should assess whether such action could be taken in a way that is both explicitly temporary and able to be implemented sufficiently promptly to serve its intended purpose," Bernanke told lawmakers.

In prepared remarks obtained by Reuters, the chief executives of Fannie Mae and Freddie Mac told lawmakers the mortgage finance companies need more freedom to weigh into the mortgage market.

"We believe having the flexibility to increase our (investment) portfolio by at least 10 percent would make a meaningful difference," Fannie CEO Daniel Mudd will tell the Financial Services Committee, according to the text.

Richard Syron, Freddie Mac's CEO, will tell lawmakers that "temporarily lifting the conforming loan limit would enable us to provide needed liquidity to a segment of the jumbo market."

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