NEW YORK - Fannie Mae, the largest provider of funding for U.S. residential loans, on Monday said it would purchase up to 200,000 delinquent loans from its mortgage-backed securities in March as it sought to clarify a new policy that has roiled the market.

The announcement comes after the government-controlled company last month said it would increase significantly the buyouts over a course of months.

Greater repurchases have been expected as soaring defaults require Fannie and rival Freddie Mac to isolate the loans as they seek to aid homeowners, or to foreclose on the property.

But the sudden policy change by Fannie Mae and Freddie Mac to boost the buyouts has unnerved investors. The buyouts can create losses by refunding, or prepaying, principal at face value, instead of at higher prices where they currently trade.

As a result, investors shunned Fannie Mae MBS most vulnerable to repurchases, given greater uncertainty of its timing. Freddie Mac had said it would conduct its repurchases in February.

Fannie Mae said it expected to purchase 150,000 to 200,000 loans from MBS this month, and it will likely continue purchases in subsequent months until it has substantially reduced the current number of loans that are delinquent by four or more months.

We have some additional clarity here, which is better than nothing, said Nicholas Strand, head of agency MBS strategy at Barclays Capital in New York.

Uncertainty will persist a little while longer until we actually see prepayments come in, he added.

Investors in the $5 trillion agency MBS market provide the lion's share of funding for U.S. mortgages since the private markets remain mostly sidelined from the credit crisis. The market is popular with government mutual funds since the securities are guaranteed by Fannie Mae and Freddie Mac, or the Federal Housing Administration in the case of Ginnie Mae MBS.

The decision to ramp up buyouts came as an accounting change made clear it would require less capital of Fannie Mae and Freddie Mac to buy and hold the securities in portfolio than to keep advancing payments to investors.

Fannie Mae provided a table of the types of MBS that are set for buyout, and said it would provide monthly updates through the end of 2010.

(Additional reporting by Julie Haviv; Editing by Leslie Adler)

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