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Fannie Mae, Freddie Mac Bailout Likely to Double, FHFA Scenarios Show

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The Federal Housing Finance Agency (FHFA) today released projections of the financial performance of Fannie Mae and Freddie Mac. The scenarios aren't pretty.

To date, Fannie and Freddie have received $148 billion in assistance from the Treasury Department. Based on the worst-case scenario outlined by the FHFA, that assistance could more than double to $363 billion over the next three years. A quick look at the projections used by FHFA to outline the various scenarios, shows that the "worst-case" is hardly the worst case at all, and more likely to be the economic reality in the coming three years. Let's take a look:

The key determinant in the scenarios is the expected home price assumptions from Moody's. Under scenario 1, the best-case, a stronger near-term recovery ensues with a peak-to-trough decline in home prices of 31 percent, followed by increasing access to credit and a forecast over three-years of a home price increase of 5 percent. Under scenario 2, which Moody's calls the "current baseline," the peak-to-trough decline is forecast to be 34 percent, bottoming in the third quarter of 2011 and prices increasing by 8 percent. The worst case scenario? continued restricted access to credit (which is a given in my opinion), and high unemployment (also a given), and the peak-to-trough decline by the first quarter of 2012 of 45 percent.

POSITION:  No positions in stocks mentioned.