The federal government is close to recouping all of its $188 billion investment in the mortgage-finance giants it took over in 2008.

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Rebounding housing market buoys mortgage-financing giants By December, Freddie will repay its bailout and Fannie will come close Freddie claims third-quarter gain of $900 million from 3 legal settlements

Federal taxpayers have nearly recouped their $188 billion investment in Fannie Mae and Freddie Mac, the mortgage finance giants taken over by the government in 2008.

Third-quarter profit rose sharply at both companies, each reported Thursday, letting Freddie Mac finish reimbursing taxpayers for its bailout and bringing Fannie within about $2 billion of repaying what it received.

Their recovery owes much to an improving housing market, legal settlements and tax benefits.

Fannie said net income more than quadrupled compared with last year’s third quarter, reaching $8.7 billion. Freddie said it earned $30.5 billion, as a $6.5 billion operating profit was combined with a $24 billion tax benefit.

Freddie said the gain represented a decision that it will be profitable enough over time to eventually use all of the massive tax benefits it built up while losing tens of billions of dollars during the financial crisis.

Freddie said it will finish reimbursing the government for its $71.3 billion bailout by year’s end, including a $30 billion payment it will make by December. In fact, the total of its payments will exceed the amount it received from the Treasury by $9 million. Fannie said it will pay $8.6 billion in December, leaving it about $2 billion short of the $116.1 billion it received from the government.

The milestone in the USA’s recovery from the 2008 financial crisis comes as a rising housing market has put Fannie and Freddie, which are still in federally supervised conservatorships, back on their feet. Fannie and Freddie together buy or guarantee most U.S. mortgages, and by taking them over, the government has expanded its role in housing since the crisis.

Ideas for how to eventually replace them with a system that relies more heavily on private capital are still at an early stage. Fannie’s and Freddie’s agreements with the Treasury call for them to gradually shrink their operations.

For now, the two entities will keep operating under 2012 agreements with the Treasury Department that require them to pay much of their profits as dividends to the government. That means taxpayers will begin reaping multibillion-dollar returns on the investment by next year, barring a reversal of the housing recovery. The requirements will be reduced gradually until 2018, reflecting the Obama administration’s intention to phase out Fannie and Freddie’s role in the market.

Already, payments from the two government-sponsored enterprises reduced the 2013 federal deficit by more than $140 billion.

It’s going to challenge the convictions of policymakers about reforming Fannie and Freddie,» said Tim Rood, a former Fannie executive who is a partner at a Washington-based consulting firm that helps businesses work with the mortgage entities and the government. You can have all the principles in the world, but with legislators flipping couch cushions looking for change, it’s hard to shoot the two-headed monster that’s spitting out $10 bills.