Fannie Mae and Freddie Mac won't exist in their current state once financial reform takes root, according to a top Treasury Department official. Prior to conservatorship two year ago, the government-sponsored entities operated under a 'heads I win, tails you lose' system that is unacceptable, Michael Barr said Wednesday before a subcommittee of the House Committee on Financial Services. They had "inadequate oversight and inadequate capital, and the market did not instill appropriate discipline…because the market assumed that they had a government backstop." The range of regulatory, management, and oversight failures throughout the financial system prompted the government takeover, according to Barr, the assistant secretary for financial institutions at the Treasury. Echoing the Obama administration's mantra, Barr said financial reform will eliminate the GSEs  and "private gains will no longer be subsidized by public losses…capital and underwriting standards will be appropriate, consumer protection will be strengthened and excessive risk-taking will be restrained." He told the House committee that Fannie and Freddie began acquiring riskier mortgages to maintain market share after private MBS participants "began to loosen credit standards to pursue ever-riskier business in a booming market." The GSEs didn't have adequate capital or appropriate risk-management techniques in place and became "dangerously exposed" as the housing market soured. Still, Barr said private capital hasn't returned to the market, and the GSEs and the government "continue to play an unfortunately outsized, though necessary, role in ensuring the availability of mortgage credit." Almost all of mortgages originated in the U.S. are financed through Fannie, Freddie, Ginne Mae, the Federal Housing Administration, the Department of Veterans Affairs or the Department of Agriculture. Barr said new mortgages guaranteed by federal programs aren't contributing to GSE losses. It's mortgages from 2006, 2007, and 2008, weighing down the balance sheet, accounting for nearly 70% of losses with even older vintages representing nearly all the remaining losses. "The conservatorship is working in keeping GSE activities within prudent bounds," Barr said. "Put simply, without the GSEs and [Ginne Mae], there would be no functioning mortgage market today." The Federal Housing Finance Agency said earlier this week that mortgages sold to GSEs from 2001 to 2008 were better quality and performed better as a percentage than private-label mortgage-backed securities. Write to Jason Philyaw.