* Companies to pay U.S. $10.2 billion in bailout dividends
* Payments to push taxpayers further into black on bailout
* Dividends do not count as repayment of taxpayer aid
* Regulator has secured $16 billion in mortgage settlements (Adds details on legal settlements, background; updates to include after-tax settlement income)
WASHINGTON, May 8 (Reuters) - Government-controlled mortgage finance firms Fannie Mae and Freddie Mac will send the U.S. Treasury dividends totaling $10.2 billion after posting quarterly profits driven mainly by income from legal settlements.
Their regulator had sued 18 financial institutions, alleging they misled Fannie Mae and Freddie Mac about the soundness of mortgages that underlay securities they sold to the two government-run companies. Those lawsuits have resulted in settlements totaling about $16 billion so far.
Fannie Mae on Thursday announced a $5.3 billion profit for the three months ended March 31, which included after-tax income of $2.8 billion from the settlements over the private-label mortgage-backed securities. Freddie Mac said it earned a net income of $4.0 billion in the same period, reflecting $3.4 billion connected to the litigation.
Under their bailout terms, Fannie Mae and Freddie Mac must turn their profits over to the Treasury as dividends on the controlling stake the government took when it seized them at the height of the financial crisis in 2008.
The companies, which own or guarantee 60 percent of all U.S. home loans, will have returned $213.1 billion to taxpayers by the end of June in return for the $187.5 billion in aid they received after being placed under the government's wing.
But their latest results suggested the record profits they enjoyed last year are unlikely to be matched anytime soon.
"Our recent level of earnings is not sustainable over the long term," said Donald Layton, Freddie Mac's chief executive officer. "Our results have been dominated for more than a year by one-time and cyclical recovery items."
A run up in mortgage rates over the past year has dampened home sales, and Federal Reserve Chair Janet Yellen said on Wednesday that a protracted housing slowdown could undermine hopes for stronger economic growth this year.
"We expect our annual earnings to remain strong over the next few years but substantially lower than we experienced in 2013," said Timothy Mayopoulos, Fannie Mae's chief executive officer. "Earnings may vary significantly from quarter to quarter and year to year due to a number of different factors such as changes in home prices or changes in interest rates."
The White House estimates the companies could pay the government $179.2 billion over the next 10 years if they are not shut down.
But to avoid the need for future taxpayer rescues, the Obama administration and lawmakers on Capitol Hill have vowed to wind down the companies and revamp the housing finance system they dominate.
The duo do not lend directly to home buyers. Instead, they buy mortgages from lenders and package them into securities that are sold to investors with a guarantee. In doing so, they help keep the mortgage market liquid.
The Senate Banking Committee will vote on a bill next week that would establish a government backstop for the market, but one that would only kick in after private investors took a big hit.
The bill, which is supported by the White House, has yet to garner the broad support it needs to ensure final passage. A Republican-backed bill in the U.S. House of Representatives would limit federal mortgage guarantees more sharply.
In mid-afternoon trade, Fannie Mae's common stock was up about 1 percent at $4.14, while Freddie Mac's was up about 0.75 percent at $4.10. Preferred shares for both companies fell slightly.
Private shareholders, including Perry Capital LLC and Fairholme Capital Management, have sued the government, claiming it is expropriating the value of their preferred shares.
The litigation is expected to drag out for years, as is the congressional effort to remake the housing finance system. (Reporting by Margaret Chadbourn; Editing by Sofina Mirza-Reid and Andrea Ricci)