Housing Market Sure to Double-Dip: Whitney

The US housing market will face another retreat while mortgage-backed securities and Treasurys are likely to go through a "material" correction, Meredith Whitney, CEO of Meredith Whitney Advisory Group, told CNBC Tuesday.

"The housing market surely will double dip," Whitney told "Worldwide Exchange."

Government programs to support housing have been "murky" and when the modifications caused by them come to an end, a lot of supply may come to the market and that's when the real-estate market is likely to go down, she explained.

Hopes that an improvement in liquidity and continuing investment from China in US assets will prop up mortgage-backed securities (MBS) and Treasurys are exaggerated, Whitney also said.

"The asset classes of MBS and Treasurys are priced for a material correction in my opinion," she said. "The only buyers of agency MBS are the Fed and banks so you see how precarious that market is."

"If the Fed pulls back, that's a really big deal... because there's no substitute buyer."

Banks Model Is Broken

The Federal Reserve can't make banks start lending again because the business model financial institutions used before the crisis is broken, Whitney also said.

"I don't think there's much the Fed can do to get banks to start lending again. That's a structural problem, the model is broken," Whitney told "Worldwide Exchange."

Before the financial crisis erupted in 2007 banks were able to offer customers low-priced mortgages because they were making money on securitizing these mortgages and selling them on, she explained.

But now that the securitization market is effectively closed, the prices of mortgages for consumers have not risen to compensate banks for that loss of revenue, so banks have been playing defense for the past two years, Whitney added.

The Federal Open Market Committee holds a meeting later Tuesday to decide on monetary policy. Fed officials have been saying that interest rates are likely to remain low for an "extended" period of time.

Whitney said she will be watching for anything regarding the Fed's stance on buying mortgage-backed securities in the statement after the meeting.

"The Fed has been supporting the housing market, a third of the Fed's balance sheet is tied to mortgages," she said.

"The banks aren't issuing anything (in terms of mortgages) to hold, they're issuing everything to dump on" Fannie Mae, Freddie Mac and Ginnie Mae, Whitney added.

Much of the profit banks made last year was due to their performance in capital markets and this is "unreplicable" this year, Whitney also warned.

"I think that people that expect an earnings handoff to a normalized scenario are going to be disappointed," she said.

"Normal will not be what it has been over the last 20 years and there's disappointment baked into that."