Fannie Mae, (FNM.P) the largest provider of funding for U.S. home mortgages, on Monday said it is launching a $1 billion program to boost money available to small- and mid-sized lenders.

The program would provide credit lines for 10 to 12 lenders in 2010, a spokeswoman said.

Since the onset of the credit crunch, banks have reined in and tightened requirements for credit to smaller lenders, curbing availability of mortgages needed to stabilize the U.S. housing market. By early 2009, capacity of these lenders fell to between $20 billion and $25 billion, from $200 billion in 2007, according to the Mortgage Bankers Association.

The so-called “warehouse lending” provides short-term funds for smaller bankers to make loans earmarked for later sale. It allows them to compete with large, retail lenders, which have taken market share in recent years.

“In this market, lenders who rely on warehouse funding are struggling to sell their loans and replenish their funds in a timely way,” said Michael Williams, President and Chief Executive Officer at Fannie Mae, in a statement.

“We are taking action now to help fill the gap by providing a billion dollars of critical liquidity targeted at smaller lenders across the country,” he said.

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