UPDATE 2-Fannie Mae seeks $1.5 bln from govt after Q2 loss

* Fannie Mae Q2 loss $3.1 bln vs Q1 $13.1 bln loss

* Asks for $1.5 bln aid vs $8.4 bln request after Q1

* Firm says has reserved for most losses

(adds details on earnings, background)

By Corbett B. Daly

WASHINGTON, Aug 5 (Reuters) - Mortgage finance giant Fannie Mae (FNMA.OB) on Thursday reported its smallest loss since the government takeover two years ago, though it still asked for an additional $1.5 billion in taxpayer aid.

The largest U.S. residential mortgage funds provider reported a loss of $3.1 billion in the second quarter, less than a quarter of the $13.1 billion it lost in the first three months of the year. Fannie Mae asked for $8.4 billion three months ago.

Including the latest request, Fannie Mae will have received more than $86 billion in direct aid from the government. The second-quarter loss, about $0.55 per share, includes a $1.9 billion dividend payment the company paid to the government.

The U.S. Treasury took control of Fannie Mae and its sister entity, Freddie Mac (FMCC.OB), at the height of the financial crisis in 2008 as loan losses mounted.

Since the government takeover, the two firms have tapped more than $146 billion in assistance from the government's unlimited credit line, scheduled to expire at the end of 2012.

The plan to put them into conservatorship was meant to be temporary. But nearly two years later, Treasury Secretary Timothy Geithner has only just begun the process of figuring out how to overhaul the U.S. housing finance system.

Geithner has called for a conference on the future of housing finance to be held at Treasury later this month.

Last month, Fannie Mae Chief Executive Michael Williams said stricter lending standards adopted last year are beginning to pay off and the firm's "new book" of business is the strongest in a decade.

Losses this year and last stemmed from loans purchased or guaranteed between 2005 and 2008.

"While these loans give rise to additional credit losses that it has not yet realized, the company estimates that it has reserved for the substantial majority of these losses," Fannie Mae said in a press release.

That could change the nature of the debate on the future of housing finance, said Jim Vogel, an analyst at FTN Financial in Memphis, Tennessee.

"We have always maintained (Fannie Mae and Freddie Mac) changes were politically improbable as long as credit was deteriorating because the fight would be about who would absorb future losses rather than what the new system should look like," Vogel said.

Fannie Mae said it expects home prices to decline slightly through the rest of this year and into next, in part because of a rising inventory of foreclosed homes coming up for sale.

Fannie Mae said the number properties it owned surged in the quarter to 129,310 from 109,989 in March.

Congress has scheduled hearings on the U.S. housing finance system in the coming months. Some Republicans on Capitol Hill have called for the abolition of Fannie Mae and Freddie Mac.

That's unlikely to happen as Rep. Barney Frank, who heads the House Financial Services Committee with oversight over Fannie Mae and Freddie Mac, earlier this year said "you can't really tear down the old jail until you've built the new one."

Any new system could take years to implement.

The government directly or indirectly backed 82 percent of newly issued mortgages in the second quarter, including loans backed by the Federal Housing Administration and the Veterans Administration, according to Inside Mortgage Finance.

The financial regulatory overhaul, which was signed into law by President Barack Obama last month, did not address reorganizing Fannie Mae and Freddie Mac, though it did restrict some mortgage lending practices that led to risky loans.

(Reporting by Corbett B. Daly; Additional reporting by Al Yoon in New York; Editing by Leslie Adler and Andrew Hay)