The regulator for Fannie Mae (FNM) and Freddie Mac (FRE) defended the retention pay promised to thousands of employees after the mortgage giants were seized by the U.S. government last fall.

"These institutions are so important to the United States at this point," Federal Housing Finance Agency Director James B. Lockhart told reporters Wednesday. "We have to make sure that there are people in there who are doing the job. The senior managers who got them into trouble have left."

FHFA hired a compensation consultant to advise the agency on retaining key employees shortly after the government took over the mortgage firms, he said.

Under the program, retention pay is doled out over three periods to employees who meet certain performance criteria. The payments are "relatively small" and cover a broad swath of employees, Lockhart said. In the case of Fannie, the retention program covers about 5,000 people, he said.

"I think it's a reasonable and well thought-out plan," he said.

The remarks come as outrage continues to boil over $165 million in retention bonuses paid about by American International Group (AIG) after it received about $170 billion in government aid.

When the government took control of Fannie and Freddie in September 2008, it agreed to pump billions into the firms as needed to keep them solvent. It also threw out their chief executives and boards.

By the end of this month, taxpayers will have sunk $60 billion into the firms. Since Fannie and Freddie aren't recipients of federal aid under the Troubled Asset Relief Program, or TARP, they aren't targeted by new restrictions on executive pay pushed by the Obama administration.

Pay has still dropped sharply for many employees at the companies, Lockhart said, with many employees earning half of what they earned before the firms were put into conservatorship. "My view is that we have to be careful and not give excessive compensation," he said.

Several top executives left the firms in the weeks and months after the government takeover.

David Moffett, who was installed by FHFA as chief executive of Freddie after the takeover, stepped down in February after just a few months in the job.

Lockhart offered praise for Moffett, saying he was a "very good, very strong manager" with a hands-on approach. However, he suggested Moffett grew frustrated with the challenges of running a government-controlled company, and all the scrutiny from politicians, regulators and the press that entails.

The next CEO of Freddie should have a strong bent toward public service, in addition to financial expertise, Lockhart argued. "You really have to have public service in your veins," he said.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com