"I would say right now we're still in a period of dislocation, prices moving up and down," Mudd said in a live interview. "We should start to settle out next year and through '09. We should see some improvement toward the end of that period."
Meanwhile, Freddie Mac expects to see $10 billion to $12 billion in credit losses on the book of mortgages it currently owns, CEO Richard Syron said at an investors conference sponsored by Goldman Sachs.
Freddie's Syron said in a separate interview with CNBC that the company has instituted a hiring freeze to help control costs as the guarantor's mortgage losses mounts.
"This is a tough time for a lot of people. It's been a very tough time with investors," he said. "We all have to share the pain."
Fannie and Freddie are government sponsored entities that are the two biggest mortgage lenders in the U.S.
Mudd predicted home prices would slip about 12 percent total by next year, which he said will be the key towards a full market correction and subsequent recovery.
"Prices inflated too fast and now we're in a process where prices are coming down to the level of supply and demand, which is still growing," he said. "It's going to take a couple of years to make that adjustment... The underlying basis, housing in America, is still solid."
Mudd also defended Fannie Mae's recent increase in up-front fees for loan applicants, which critics complain is making it more difficult even for top-quality buyers to afford mortgages.
"The business that we're in is to provide guarantees to lenders that those underlying loans will perform over time," he said. "The certainty with which you can guarantee that those loans can perform is more expensive."