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UPDATE 2-Fannie Mae, Freddie Mac to send U.S. Treasury $5.6 billion

(Recasts with Freddie Mac results, quote from Fannie Mae CEO, background)

WASHINGTON, Aug 7 (Reuters) - Government-controlled mortgage finance firms Fannie Mae and Freddie Mac said on Thursday they will pay U.S. taxpayers a combined $5.6 billion in dividends after another profitable quarter.

Once they make their latest payments in September, they will have returned $218.7 billion to taxpayers in return for the $187.5 billion in aid they received after being placed under the government's wing at the height of the financial crisis.

The two companies, which buy mortgages from lenders and repackage them into securities they sell to investors with a guarantee, were seized by the U.S. government in 2008 as they teetered on the brink of insolvency.

Under their bailout terms, the firms turn their profits over to the Treasury as dividends on the government's controlling stake.

Fannie Mae, the nation's largest source of mortgage funds, earned a $3.7 billion profit between April and June and will turn it over as its dividend payment. Freddie Mac, the No. 2 mortgage provider, will pay the Treasury $1.9 billion.

Shares for the two companies edged higher.

The dividends had swelled in recent quarters as the companies received funds from legal settlements and booked big profits on accounting gains from the recognition of deferred tax assets.

Fannie Mae's profits - and its dividend payment - were lower than in the first quarter largely because of a reduction in settlement payments. Freddie Mac reported $400 million in settlements in the second quarter, which was just a sliver of what it took in the first quarter.

The regulator for the two firms had sued 18 financial institutions for allegedly misleading Fannie Mae and Freddie Mac about the soundness of mortgages that underlay securities they sold.

Both the settlements and the tax matters appear to be largely behind, Fannie Mae Chief Executive Tim Mayopoulos said on a conference call with reporters. In a positive sign for future profits, Fannie Mae said rising home prices had helped its bottom line.

"This quarter gives you a good sense of a normalized environment," he said.

The U.S. housing market slowed sharply in 2013 after mortgage rates rose, but home resales have been rebounding since early this year.

Fannie Mae and Freddie Mac have been a minor cash cow for the Treasury in recent years, paying back all their bailout funds and more. But their obligation to turn over all their profits to the Treasury has helped keep them undercapitalized, analysts say, and a severe downturn in the housing market could eventually lead them to require further bailouts.

The Obama administration has argued for replacing Fannie Mae and Freddie Mac with a new entity, but lawmakers appears unlikely to address housing reform until at least after congressional elections in November - and any reform effort would likely be a multi-year task.

Republicans want to see less government support of mortgages, while some Democrats argue low-income borrowers should get more support.

Private shareholders in Fannie Mae and Freddie Mac have sued the government over the dividend policy, claiming Washington is expropriating the value of their preferred shares.

The litigation, currently in pre-trial phases, is expected to drag on for years.

(Reporting by Jason Lange; Editing by Andrea Ricci)