WASHINGTON ( TheStreet) -- The government's enormous estimates of how much more cash taxpayers will have to dole out to keep Fannie Mae ( FNMA.OB) and Freddie Mac ( FMCC.OB) alive indicate that the two firms have become a necessary evil on the long road to a housing recovery. The government estimated on Thursday that the two mortgage-finance giants may require $142 billion to $363 billion over the next few years. The outcome is heavily dependent upon two unpredictable factors: Home prices and interest rates. In an ironic twist, the cost to taxpayers will be $80 billion to $100 billion lower if Fannie and Freddie aren't required to pay dividends on the funds to the U.S. Treasury Department. The two firms have to borrow more money from the in order to pay those fees... from the Treasury. Since the government took over Fannie and Freddie in September 2008, the loss projections have only climbed. Last December, the Treasury lifted the cap on their $400 billion credit line to offer unlimited support. So far, they've drained $148 billion from the taxpayer till. >>>Read More:
Fannie and Freddie: Making Bank Bailouts Look Cheap >>>Read More: Fannie-Freddie Bailout: $148B and Counting >>>Read More: Will Obama Slay the Fannie and Freddie Beast? In determining forward-looking cost estimates, Fannie and Freddie's regulator, the Federal Housing Finance Agency (FHFA), relied heavily upon housing-market projections from a Sept. 30 Moody's ( MCO) analysis. It also assumed that interest rates will run along the track of the so-called "forward curve" of interest-rate swaps as of June 30. Using Moody's middle-of-the-road assumptions, home prices will be just about where they are right now by the end of 2013, following an additional decline of less than 10%. In the optimistic scenario, prices will stay essentially flat, ending up a tad higher by 2013. In the most bearish case, they'll still be down 15% by that time, on the way to a recovery a couple years down the line. But if there's anything we've learned in recent months about either item - home prices or rates - it's that even the most logical assumptions can run amok. Since April, home sales have declined sharply and prices have struggled to stay brittle - despite historically low mortgage rates. Since June, rate futures have fallen dramatically as market discussion turned from "when inflation will occur" to "whether deflation will occur." The yield curve - representing the difference between short-term and long-term rates - has flattened so much that banks found it hard to make money on new loans last quarter, even when their funding costs are essentially nil.
Big banks' recent problems with documentation sloppiness have helped to muddy the outlook for a potential recovery. The foreclosure process - which accounted for 31% of sales last quarter - is nearly frozen. Banks were pushing paperwork through the system so quickly that employees didn't bother to verify information in affidavits they were signing. The securitization process- which has accounted for nearly all sales since the 1980s - is starting to get icy. Banks have been forced to buy back tons of mortgage-backed securities (MBS) from Fannie and Freddie because of documentation errors at the time of origination. The threat of litigation looms from private mortgage investors who are demanding the same, but have had less success in getting big banks to repurchase souring MBS. Bank of America ( BAC - Get Report), JPMorgan Chase ( JPM - Get Report), GMAC Mortgage and PNC Financial Services ( PNC - Get Report) have all implemented temporary foreclosure moratoriums, while others, including Wells Fargo ( WFC - Get Report), Goldman Sachs ( GS - Get Report), U.S. Bancorp ( USB - Get Report) and Ciitgroup ( C - Get Report), are taking a closer look at documentation practices. While all of that is going on, regulators and market participants are figuring out just what to do with Fannie and Freddie. >>>Read More:
News Flash: Fannie, Freddie Kaput All of these factors have raised questions without clear answers: How long will banks will be tied up in litigation with investors, homeowners and attorneys general? When will they be able to start flushing out all the bad mortgage muck again? When will it make economic sense for banks to originate new, better loans? How will the market fund mortgages in the future if the securitization process is too messy? How will the future mortgage-finance system be set up? In other words, it's hard to tell how or when the mortgage market will be able to move forward, much less where home prices or interest rates will be. FHFA's acting director, Edward DeMarco, gave a nod to that unpredictability in a statement regarding the loss estimates. He asserted that the numbers were "projections" and not "predictions" of what might happen, based on the information now available. Nonetheless, Fannie and Freddie will continue to be a big, gaping hole of taxpayer loss. To date, the two mortgage-finance zombies have drawn $148 billion from an unlimited credit line the Treasury Department is offering. DeMarco has taken a tough stance on banks and on the issue of housing-finance reform. But he was careful not to use judgmental phrases about Fannie and Freddie in a statement that came along with the agency's cost projections. After all, Fannie and Freddie may cost taxpayers billions of dollars - as will the "Making Home Affordable" homeowner-bailout portion of TARP - but they've also provided crucial support throughout the financial crisis. Without them, Moody's "Deeper Second Recession" scenario might be a bottomless pit.
"These projections are intended to give policymakers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac," said DeMarco. "These are not predictions; the results reflect the potential effects of a limited set of hypothetical changes in house prices, a key variable driving credit losses for the enterprises." -- Written by Lauren Tara LaCapra in New York. >To contact the writer of this article, click here: Lauren Tara LaCapra. >To follow the writer on Twitter, go to http://twitter.com/laurenlacapra. >To submit a news tip, send an email to: firstname.lastname@example.org.