The Federal Housing Finance Agency, in its fourth annual report to Congress assessing Fannie Mae’s and Freddie Mac’s financial soundness, said the GSEs remain in critical shape.

In its report, the regulator of the GSEs concluded that Fannie and Freddie continue to exhibit financial weaknesses as evidenced by their poor performance, condition and prospects.

It also said credit risk remains high at Fannie, but is somewhat mitigated by the higher quality of its single-family book of business since 2009. Business operations are vulnerable to disruption, the examination found, especially by human capital risk, and capital is wholly dependent on the support of the U.S. Treasury.

“Although risk is high, the quality of credit risk management is adequate and the level of risk is decreasing,” the FHFA concluded about Fannie. “Our principal concerns are the credit characteristics of the enterprise’s legacy 2005 to 2008 vintage single-family book of business, opportunities to improve multifamily risk management, and continued weak mortgage insurer counterparties.”

Freddie’s control structure is weak, human capital risk is elevated, and capital is wholly dependent on the support of the U.S. Treasury, the report states.

“Freddie Mac’s enterprise risk management structure continues to benefit from a recent redesign being implemented,” the FHFA said. “However, management is finding it difficult to maintain an adequate control structure because of increased employee turnover and reliance on manual processes.”

While the conservatorship of Fannie and Freddie combined with U.S. Treasury financial support and management actions stabilized Fannie, they have not been restored to a sound financial condition. The FHFA identified several significant risks: credit; human capital; dependence on a legacy infrastructure that needs to be updated; and the requirement to execute the strategic plan for the conservatorships.

Both Fannie and Freddie guaranteed roughly $100 billion a month in new mortgages in 2011, accounting for three of every four mortgages originated in 2011. As of year-end 2011, the cumulative draws on the U.S. Treasury from the GSEs totaled $187.5 billion.

Since the first quarter of conservatorship in September 2008, more than 2.1 million foreclosure prevention actions were completed on Fannie and Freddie loans.

The FHFA, Fannie and Freddie still face the challenges of building a planned infrastructure for the secondary mortgage market — plans for which should receive finalization by year-end — contracting their dominant presence in the marketplace and maintaining foreclosure prevention activities and mortgage credit availability.

However, the regulator said management and the boards were responsive throughout 2011 to its findings and challenges and took appropriate steps to begin resolving identified issues.