June 2 (Bloomberg) -- Christopher Cox, in one of his last acts as Securities and Exchange Commission chairman, took Fannie Mae and Freddie Mac’s regulator to task in a letter questioning whether the agency was upholding its legal duty to “preserve and conserve” the mortgage companies’ assets.

Cox asked in the Jan. 16 letter to Federal Housing Finance Agency Director James Lockhart whether the government-sponsored enterprises were being pressed too hard to bolster U.S. housing markets at the expense of profits. As a member of an oversight board advising Lockhart, Cox urged Lockhart to develop an “exit strategy” from government conservatorship that would restore the companies’ finances.

The letter from Cox, which hasn’t been made public, underscores the tension between Fannie Mae and Freddie Mac’s responsibilities to investors and government demands that they help end the worst housing crisis since the Great Depression. The issues facing the companies, saddled with seven consecutive quarters of losses totaling $150 billion, will be examined by a House panel tomorrow.

“The statutory and publicly stated goal for the conservatorship is to restore these institutions to financial health,” Cox wrote four days before Democrats took control of the White House.

Public demands on the companies may prevent their emergence from government control, Cox said in the letter. He warned of “significantly” adding to taxpayer liabilities.

55% of Loans

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac are the largest U.S. mortgage-finance companies, owning or guaranteeing about 55 percent of single-family loans. They were seized by President George W. Bush’s administration in September as their losses deepened.

Fannie Mae closed down 2 cents to 70 cents today in New York Stock Exchange composite trading, and Freddie Mac fell 2 cents to 78 cents. Both are down 97 percent from a year earlier.

Lockhart declined to comment directly on Cox’s five-page letter. He said in an e-mailed statement last week that the role of Fannie Mae and Freddie Mac in reducing foreclosures will help stem the companies’ losses in the long run.

“As Fannie Mae and Freddie Mac hold or guarantee $5.4 trillion of mortgages, stabilizing the mortgage market is extremely important to their financial future,” Lockhart said. Cox and SEC spokesman John Nester declined to comment.

Cox left the SEC on Jan. 20 when Barack Obama was sworn in as president. The SEC has been criticized by lawmakers and investors as being deferential to Wall Street banks during Cox’s 3 1/2-year tenure.

‘Give Him Credit’

The Government Accountability Office said in a May 6 report that under Cox, the SEC instituted policies that slowed cases and led enforcement-unit lawyers to conclude that commissioners opposed fining companies.

“I give him credit for getting the call correctly here, which is oversight is bad and it should have been stronger,” said James Cox, a law professor at Duke University in Durham, North Carolina, who isn’t related to the former SEC chairman.

Christopher Cox served on the four-member Federal Housing Finance Oversight Board, created by Congress in July to advise the Federal Housing Finance Agency headed by Lockhart.

The oversight board now includes Lockhart, current SEC Chairman Mary Schapiro, Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan.

Fannie Mae and Freddie Mac were among the few remaining sources of mortgage credit after the housing market collapse last year. The Bush administration pushed the companies to reduce fees and loosen credit standards to stem foreclosures.

Obama’s Plan

Obama went further than Bush, making the companies a central part of his plan to save as many as 9 million homeowners from foreclosure through low-cost refinancing and easing of loan terms. Fannie Mae and Freddie Mac are required to cover $25 billion of the administration’s $75 billion loan-modification program called Making Home Affordable.

“Fannie and Freddie are being used by the Obama administration, as they were by the prior administration, as social policy tools,” said Joshua Rosner, an analyst with independent research firm Graham Fisher & Co. in New York.

Both companies said in securities filings last month that policy demands are hampering their recovery, and may leave them dependent on government aid.

‘Who Can Complain?’

The companies’ regulator may be violating the law requiring FHFA as conservator to “preserve and conserve” the companies’ assets, said Adam Pritchard, a securities law professor at the University of Michigan in Ann Arbor.

“It might all be illegal, but who can complain?” Pritchard said in an interview, referring to the demands by Bush and Obama on the companies.

Fannie Mae has reported a combined $86.8 billion in net losses going back to the third quarter of 2007, and Freddie Mac has logged $63.6 billion in losses over the same period. To remain solvent, the companies have requested a combined $84.9 billion in taxpayer funds from a $400 billion pool set up by the Treasury after their takeover.

At the core of their troubles are about $152.3 billion in subprime and “Alt-A” assets acquired mostly from 2005 through 2007, according to Lockhart. Cox said in the letter that the volume of “high risk mortgage products” owned or guaranteed by Fannie Mae and Freddie Mac may be closer to $1.7 trillion.

Possible Consequences

Failure to make Fannie Mae and Freddie Mac financially sound would impose expanded burdens on the Treasury and private debt markets because their $1.7 trillion in unsecured debt and $4 trillion in mortgage bonds are so widely held, he said. The government would bear responsibility even though the companies’ liabilities aren’t technically backed by its full faith and credit, he wrote.

The U.S. may be forced to assume the companies’ liabilities, increasing the $11.3 trillion in outstanding U.S. debt by about 50 percent and hampering the Treasury’s ability to borrow, Cox said.

If the government chose not to back Fannie Mae and Freddie Mac’s debt and they defaulted, Cox said there may be “significant impact on both the Treasury market as well as the agency market, including the Federal Home Loan Banks, the Farm Credit System and the Tennessee Valley Authority.”

The hearing tomorrow by a subcommittee of the House Financial Service Committee will “begin the long-term debate on how Fannie Mae and Freddie Mac will be structured going forward, after we stabilize the economy,” said Representative Paul Kanjorski, a Pennsylvania Democrat who heads the panel.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: June 2, 2009 17:33 EDT