UPDATE 4-Freddie Mac posts 2nd-biggest profit in its history
* Mortgage finance firm Freddie Mac reports net income of $4.6 billion
* Pays $5.8 billion dividend to U.S. Treasury
* Bailed-out firm foresees $7 billion payment to Treasury in June
* Reversal of tax asset write-down could come in Q2
* Profitability throws kink in housing finance reform effort
WASHINGTON, May 8 (Reuters) - Freddie Mac, the No. 2 provider of U.S. mortgage money, on Wednesday said it reaped its second-largest profit ever in the first quarter, a reflection of housing market gains that have taken the steam out of efforts to revamp the nation's home loan system.
The government-controlled company reported net income of $4.6 billion for the first three months of the year, up from $577 million in the year-ago quarter. It cited rising home prices, falling mortgage delinquencies and increased refinance activity for the improved performance.
It was the company's sixth straight quarterly profit and the largest since a $5.7 billion gain in the third quarter of 2002.
"The strong rebound in the housing market ... continues to be reflected in our excellent financial performance," Freddie Mac Chief Executive Officer Donald Layton told reporters on a conference call.
Freddie Mac, which faced insolvency when it was seized by the U.S. government in 2008 along with its larger rival Fannie Mae, paid $5.8 billion to the U.S. Treasury in the first quarter as a dividend payment under the terms of its government bail-out.
It said it would make another $7 billion payment in June, and suggested it could record gains on $30.1 billion worth of assets it had written down as early as in the second quarter, leading to an even bigger payment.
Freddie Mac and Fannie Mae, which together own or guarantee about half of U.S. home loans, have tapped $187.5 billion in taxpayer aid since being placed in conservatorship.
But they have both returned to profitability, helped by the Federal Reserve's aggressive efforts to lower interest rates.
The swing in their financial fortunes has undercut the urgency the Obama administration and lawmakers have felt to wind them down, particularly given a steady stream of dividends that now totals more than $65 billion.
"There's a mindset of 'Why fiddle with anything now that it's going well?'" said Anthony Sanders, finance professor at George Mason University and a former mortgage bond strategist. "We are seeing the interest waning in doing anything with them."
ONLY GAME IN TOWN
Lawmakers in Congress, both Democrats and Republicans, think Fannie Mae and Freddie Mac should eventually be wound down. However, there is no agreement about what should take their place or how large a role the government should play in making sure mortgage credit is available.
The Obama administration outlined three broad approaches in 2011 for revamping the housing finance system but has stopped short of saying which route it would prefer.
Without some form of a government backstop, the 30-year fixed rate mortgage that many Americans rely on would be exceedingly rare.
Fannie Mae and Freddie Mac do not make loans, but provide financing to banks and other lenders by purchasing mortgages, which they either hold or repackage as securities that are sold to investors with guarantee.
The government guarantee they offer makes it hard for private financial firms to compete. So-called private label residential mortgage-backed security issuance has been just $4 billion year to date, compared with $637 billion from government-sponsored enterprises, according to the Securities Industry and Financial Markets Association, a Wall Street lobby group.
Under new bailout terms put in place this year, Freddie Mac and Fannie Mae must turn over most of their profits to the government. Previously, the two were required to pay a 10 percent dividend even if they faced a loss, and in some quarters they had to draw on taxpayer funds just to make the payment, even if they had a small increase in net income.
Their return to profitability has allowed them to consider booking gains from so-called deferred tax assets they had written down, which would increase their net worth and lead to large one-time payments to the Treasury.
Freddie Mac decided in the first quarter not to reverse about $30.1 billion in the write-downs of its deferred tax assets, but said it would likely reverse the write-down in either the second or third quarters.
The company has certain requirements and thresholds set up with auditors that it must meet before writing up the assets.
"We could pass that test as early as next quarter," Layton said.
Fannie Mae is weighing whether to reverse a write-down on about $60 billion.
Despite their now steady dividend payments, Fannie Mae and Freddie Mac will never be able to free themselves of government control under the current terms of their bailout, which do not allow them to build equity or purchase the preferred shares the government has taken.
The White House has estimated taxpayers might end up seeing a $51 billion profit on the federal funds injected in Fannie Mae and Freddie Mac if the two companies remain in conservatorship through fiscal year 2023.