UPDATE 1-Fannie Mae, Freddie Mac still face weaknesses-FHFA

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NEW YORK, May 18 (Reuters) - Fannie Mae and Freddie Mac, the largest providers of residential mortgage funds, are still falling short in addressing management concerns that led the U.S. government to seize the companies eight months ago, their federal regulator and other U.S. officials said on Monday.

Pressure on Fannie Mae (FNM.P: Quote, Profile, Research) and Freddie Mac (FRE.P: Quote, Profile, Research) from the regulators comes after the companies reported big first-quarter losses and warned that their profitability would be challenged as the housing market weakens further. They have required some $60 billion in capital from the government since late 2008 to continue supporting the mortgage market.

The companies have "made strides in remediating problems, but they still face numerous significant challenges including building and retaining staff and correcting operational and credit management weaknesses," members of the Federal Housing Finance Oversight Board said in a report to Congress.

Federal Housing Finance Agency Director James Lockhart, Treasury Secretary Timothy Geithner and other members of the oversight board also stressed that the U.S. conservatorship of the companies, in place since the government rushed to save the them from massive capital shortfalls in September, "cannot be a permanent state."

But emerging from conservatorship hinges on a housing recovery and probably, Congressional action, they said. Decisions to fix or replace the current Fannie Mae and Freddie Mac model -- shareholder-owned with support from the government -- will drive future operations of the companies, they said.

The future of the companies, which own or guarantee more than $5 trillion in U.S. single- and multi-family mortgages, is of keen interest to investors, especially in bond markets where the companies routinely raise billions of dollars in debt. But longer-term investments in the companies have been clouded by a lack of clarity over the roles of the companies when the U.S. unshackles the entities from conservatorship.

The oversight board report was also signed by Mary Schapiro, chairman of the Securities and Exchange Commission, and Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development.

Both Fannie Mae and Freddie Mac are crucial cogs to President Barack Obama's plans to make refinancings more widely available. The companies can improve their credit positions through the programs, the report says, though Fannie Mae this month also said implementing the plans could make it harder to return to profitability.