(Adds details from letter, background)
WASHINGTON, April 25 (Reuters) - A U.S. Senate bill on housing finance reform could undermine the stability of the mortgage market if it became law in its current form, the head of government-run mortgage financier Freddie Mac warned the company's regulator.
Donald Layton, chief executive of Freddie Mac, said in an April 16 letter to the director of the Federal Housing Finance Agency that lawmakers should take steps to make sure Freddie Mac could fulfill its role supporting the mortgage market during any transition period to its eventual closure.
The bill, written by Senate Banking Committee Chairman Tim Johnson, a Democrat, and Senator Mike Crapo, the panel's top Republican, would replace Freddie Mac and larger rival company Fannie Mae with a new government reinsurer.
"The risk that Freddie Mac would not be able to carry out its core policy function is extremely high," Layton said. A copy of the letter was obtained by Reuters.
Fannie Mae and Freddie Mac, which were both seized by the federal government in September 2008 at the height of the financial crisis, are the primary sources of U.S. mortgage funds. They buy loans from lenders and turn them into mortgage-backed securities, which they sell to investors with a guarantee.
"The ability of Freddie Mac to continue to support the mortgage markets and the U.S. economy during an unprecedentedly lengthy transition period should be one of the most important objectives," Layton wrote. "The existing bill draft does not focus on this issue."
The Johnson-Crapo bill provides for a five-year wind down of Fannie Mae and Freddie Mac, which could be extended if needed to prevent market disruptions or an increase in borrowing costs.
Layton said that during the time it would take to phase out the government-run company, there is an "extremely high risk" that Freddie Mac could not carry out its core function of ensuring the "liquidity, stability, and affordability of U.S. housing markets."
He expressed concern the bill did not clearly establish what the government-run companies would be expected to do during the transition period, and said there was the potential for a staff exodus that would further impair business.
(Reporting by Margaret Chadbourn; Editing by Leslie Adler)