NEW YORK (Bloomberg) — Fannie Mae and Freddie Mac, the linchpins of the American housing market, continue to bedevil the US financial system.

In February 2003, their regulator issued a report saying the companies were taking on too much risk by using implicit government backing to plunge deeper into the mortgage market.

The government-sponsored enterprises would pose a systemic threat to the economy in the "remote" chance that either failed, Armando Falcon told the Bond Market Association the same day.

The Bush administration, considering his report a potential threat to financial markets, asked him to resign.

Five years later, regulators seized the mortgage-finance companies, and since then, leaders including former Federal Reserve Chairman Alan Greenspan and Warren Buffett have argued the companies can't be sustained in their dual roles — a for-profit enterprise beholden to shareholders and a tool of housing policy. They have said they should be nationalised or sold.

Nevertheless, nothing has happened. Instead, Fannie Mae and Freddie Mac, which buy home mortgages from banks and package them into bonds sold to investors, have been bailed out with $1.5 trillion in direct and indirect government aid. The Obama administration is banking on the companies to help end a three-year housing slump. The president is delaying plans to lay out a new framework for them in February, and Congress hasn't scheduled hearings on their future.

"They're going to get a giant pass on all of this," said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia who is now a bank analyst at FBR Capital Markets in Arlington, Virginia. It's going to be "three to five years before their fate is determined".

Rather than beginning to extricate itself from Fannie Mae and Freddie Mac — as it is with other bailed-out businesses — the Treasury Department on Christmas Eve removed a $200 billion limit on aid to each of the companies and promised to cover their losses through 2012.

Earlier, the Federal Reserve extended a mortgage-bond purchase programme by three months, through March.

The approaching withdrawal of Fed support in the form of the mortgage-bond purchases risks "a very, very scary situation," said Meredith Whitney, founder of Meredith Whitney Advisory Group LLC in New York. Mortgage rates would soar, endangering the economic recovery, if private buyers failed to step in to buy the companies' debt, she said.

The status of Fannie Mae and Freddie Mac isn't dealt with in the proposed overhaul of the financial regulatory system that the Senate plans to take up next year.

While Treasury Secretary Timothy Geithner said in June that the companies' future would be discussed in the president's budget outline in February, the Treasury in its December 24 statement promised only to provide a "preliminary report" by then.

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee about $5.5 trillion of the $11.8 trillion in US residential mortgage debt. They have financed as much as 75 percent of new US mortgages in 2009.

They have been run for more than 40 years as shareholder-owned companies that also have a federally chartered mission to promote the housing market. Those dual mandates have collided and contributed to the companies' failure, said Federal Deposit Insurance Corp. Chairman Sheila Bair.

"Go one way or the other," Bair said in an interview. "Either completely privatise them and get them completely out or run them as public utilities." The hybrid structure, with private shareholders, public mandates and federal backstopping, "is classic too big to fail."

The companies are helping carry out the Treasury Department's $75 billion plan to let as many 9 million homeowners modify or refinance their loans to more affordable terms to curb foreclosures.

The Federal Reserve has bought $1.1 trillion of Fannie Mae and Freddie Mac's home-loan bonds and $124.1 billion of their corporate debt in 2009. Those actions have lowered the companies' funding costs and pushed mortgage rates to a record low 4.71 percent in December.

For the year, interest rates on typical 30-year fixed-rate mortgages have averaged 5.04 percent, down from 6.05 percent in 2008, according to weekly surveys by Freddie Mac.

To help keep the GSEs solvent, the Treasury has also bought $191 billion of Fannie Mae and Freddie Mac mortgage bonds, and made $112 billion of preferred stock purchases.

The companies have lost a combined $188.4 billion in the past nine quarters. The federal government now holds almost 80 percent of the equity in each of the entities.

Ajay Rajadhyaksha, a managing director at Barclays Capital in New York, says fears that Fannie Mae and Freddie Mac won't be able to find buyers when the Fed halts its purchases of their corporate debt and mortgage bonds are overblown.

"When you have someone as big as the Fed was in 2009 walking away cold turkey, there have to be bumps along the road," Rajadhyaksha said in an interview. "But the thing to keep in mind is the massive amsounts of cash that many investors have, which they absolutely want to put to work."

The FDIC's Bair says the market needs to be tested, even if the price of some mortgage bonds falls.

"At some point you're going to have to do it anyway, and if the market won't support the values, and they have to go down, then well, that's what the price should be and that's how they should be valued," Bair said. If the Fed is "gradual about it, I think they can ease out."

Alabama Senator Richard Shelby, the ranking Republican on the Senate Banking Committee, said it's a "grave mistake" to delay decisions about Fannie Mae and Freddie Mac's future. "I fear that the longer we wait, the more it is going to cost the American taxpayer," Shelby said at an October 8 hearing.

Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, is putting Fannie Mae and Freddie Mac at the top of next year's agenda, said Steven Adamske, a spokesman for the lawmaker.

"There is nothing on paper right now, but that day is coming," Adamske said. "Their future is one of our next priorities next year."