Fannie and Freddie in 'critical' condition

Regulator says companies still suffer from severe operational and financial weaknesses. Recruiting executives also tough.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Fannie Mae and Freddie Mac, charged with helping lead the nation out of its housing crisis, are facing "critical" financial problems, federal regulators said Monday.

The companies suffer from severe financial, operational and compliance weaknesses, the Federal Housing Finance Agency said a report to Congress detailing its annual examinations of the firms. Taken over by the government in September, Fannie and Freddie are not able to operate without federal assistance.

"With new senior management teams, each enterprise has made strides in remediating problems," the agency said. "But they still face numerous significant challenges including building and retaining staff and correcting operational and credit management weaknesses that led to conservatorship."

Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) play a vital role in the national housing market, accounting for a combined share of 73% of mortgage originations in the second half of 2008. They also serve central roles in the Obama administration's foreclosure prevention plan.

To continue functioning, the firms have drawn down about $60 billion of their combined $400 billion lifeline from the federal government. Fannie reported a $23.2 billion quarterly loss and Freddie a $9.9 billion quarterly loss earlier this month.

One hurdle to putting Fannie and Freddie back on firm financial footing is the many vacancies in their executive ranks. Hiring has been slowed by compensation concerns, the agency said.

While the housing meltdown prompted the companies' near collapse in 2008, this year will also be difficult. Fannie Mae will face challenges as it works with servicers to help troubled borrowers and to manage and sell a growing inventory of foreclosed properties, the agency said. Freddie Mac, meanwhile, needs to improve its internal controls and find a chief executive officer.

"The problems of the last two years in the financial markets are slowly abating, but the challenges in the housing markets continue," said James Lockhart, the agency's director. To top of page

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