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* Credit losses fall to $3.5 bln from $4.5 bln
* Lower credit loses, rising home prices help results
* Fannie pays $2.9 bln dividend, does not tap Treasury
WASHINGTON, Nov 7 (Reuters) - Fannie Mae, the mortgage finance giant that has received billions in government bailout money, on Wednesday said an improving housing market helped it earn enough in the third quarter to avoid tapping more taxpayer funds.
Fannie Mae reported net income of $1.8 billion in the July-September period, which would allow it to pay a dividend of $2.9 billion to the government for its taxpayer-financed bailout. The profit compares with a a loss of $5.1 billion a year earlier.
It was the third straight quarter that Fannie Mae, which was taken over by the government in September 2008, was able to pay the dividend without drawing on government funds.
Fannie Mae has paid about $28.5 billion in dividends and drawn about $116.1 billion from Treasury.
"We are seeing signs of sustained improvement in housing and our actions to support the housing recovery have generated strong financial results in 2012," Fannie Mae Chief Executive and President Timothy Mayopoulos said in a statement.
Fannie Mae and its smaller rival Freddie Mac have soaked up almost $190 billion in taxpayer funds since the government seized them in 2008 at the height of the financial crisis.
Both companies have stopped relying on government aid to stay afloat recently, after years of cash injections, as rising home prices help limit cash losses on homes that fall into foreclosure.
The strong performance in the third quarter was boosted by lower credit losses, which fell to $3.5 billion from $4.5 billion a year earlier, and rising home prices.
Aside from an increase in home values, both Fannie Mae and Freddie Mac, which buy home loans from lenders and repackage them as securities for investors, have noted improvements in the performance of loans they purchase and guarantee.
"We continue to see home prices improve again in the third quarter, albeit not nearly at the level they did in the second quarter. That is the single biggest driver in the results," Susan McFarland, chief financial officer, said in an interview. "We've got to continue to work through the delinquent book of loans," she added.
On Tuesday, Freddie Mac reported a $2.9 billion third-quarter profit compared with a year-earlier loss of $4.4 billion. The company said it was making a $1.8 billion dividend payment to the Treasury and did not seek any new aid.
Freddie has now given back $21.9 billion in cash dividends, or 31 percent of the total amount it has drawn from the government, and requested $71.3 billion in taxpayer funds.
Starting next year, the two companies will be required to turn over all their profits to the Treasury as a dividend payment and shrink their investment portfolios more quickly.
Previously, the two companies were required to pay a 10 percent dividend payment to the Treasury on senior preferred shares, whether or not they made money. At times, that meant they had to draw money from the government just to make the payment.
"What we're focused on is doing what we can do to stabilize the housing market today and to build a better housing finance system for the future," McFarland said. "We let the politics, let the administration work through what they think the right construct should be in the future."