WASHINGTON, Feb. 8 (UPI) -- Allowing Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) to handle larger mortgages could push the lender into riskier territory, a banking regulator told key U.S. senators.

An increase of 25 percent in the loan ceiling, permitted temporarily as part of the Senate's economic stimulus package, would effectively raise Freddie Mac's home mortgage limit from $417,000 to $729,750.

But, James B. Lockhart III' title='James B. Lockhart III' class='tpstyle'>James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, told the Senate Banking Committee Thursday that the increased limit wouldn't only increase risks, it would siphon available funds needed for smaller loans.

Lockhart told the committee that the capital required to finance a $600,000 mortgage could finance three $200,000 loans, The Washington Post (NYSE:WPO) reported.

The lenders have argued that some high-priced markets require increasing the loan limits. The ability to do so without new regulations is seen as a victory for the lenders.

But new regulations have been discussed. Since 2003 and 2004, when accounting scandals at Freddie Mac and Fannie Mae surfaced, lawmakers and regulators have been calling for changes in the system, the Post said.

Freddie Mac Chief Executive Richard F. Syron has said setting up new regulations to handle larger loans would be "kind of a bear to do," the report said.