Housing's Worst Case

Foreclosed Home
Foreclosed Home

Yesterday the regulator for Fannie Mae and Freddie Mac put out a forecastof how much the two mortgage giants would cost taxpayers through 2013.

It drew three different scenarios based on home prices staying as they are, improving and deteriorating.

Check out yesterday's blog for those details.

After the news hit, there was much consternation at the Treasury Department because many news outlets went with that big worst case scenario headline of the big bailout costing $363 billion. That number does not take into account 10 percent dividends that Fannie and Freddie are required to pay back to the government as part of the deal.


Treasury Draw
Dividends Back to Treasury
Net Cost
% of Total
Draws/Dividends to Date $148B $13B $135B 88%
Baseline Scenerio $90B $71B $19B 12%
Cumulative $238B $84B $154B 100%
Source: Hancock Timber Resource Group

"Those dividends are specifically designed to compensate taxpayers and make sure taxpayers are paid back," Asst. Treasury Secretary for Financial Institutions Michael Barr told me. They will also keep Fannie and Freddie from ever turning a profit. Barr wanted to make sure I knew that under the "baseline" or current stay-the-same scenario, nearly 90 percent of the losses have already happened. We're only looking at about $19 billion more if the housing crisis ends quickly.

Then there's the bad scenario, where house prices would fall further and taxpayers could have to cough up $124 billion more. I asked Barr which he thought was most likely, and he politely informed me that he doesn't do prognostications or projections or whatever you want to call them. When I tried to change the subject to that nasty mortgage securitization issue, since I did have him on the phone, he continued to toe the Administration's line that, "based on evidence thus far there are no structural flaws in the system of mortgage securitization," an issue that could cost the big banks billions of dollars or at the very least a wildly hefty litigation bill.

"I don't put a lot of credence in any of the numbers," Barr added with respect to recent screaming headlines of multi-billion dollar bank losses from loan"put-backs." [That's where investors (including Fannie and Freddie) force the banks to buy back bad loans that may have been misrepresented during securitization.]

While Mr. Barr doesn't want to predict the future of home prices, a firm called Clear Capital today put out an "Alert." They usually do a monthly home price report which mirrors very closely the results of the more widely-followed S&P/Case-Shiller Home Price Index. Today's report runs the numbers through October 12th, about half the month, and finds a precipitous recent drop, leading to a 5.9 percent drop in home prices over the past two months. Granted, it's mostly the tax credit hangover, but far worse than was expected.

"The reason this is so scary is that we have a very severe price decline in two months, added on top of the robosigning issue that has a lot of people scared, and going into the winter months, which is classically the slow time for real estate, and prices are generally stressed," says Clear Capital's Kevin Marshall. "Put those three things together for Q4 2010 and Q1 2011, and we are in for a rough ride."

"The reason this is so scary is that we have a very severe price decline in two months, added on top of the robosigning issue that has a lot of people scared, and going into the winter months, which is classically the slow time for real estate, and prices are generally stressed." -Clear Capital, Kevin Marshall

As I have said over and over on this blog, and everywhere else anyone will listen, the housing market today is all about confidence, or lack thereof. Uncertainty is ruling the roost, and none of the usual indicators are worthy predictors anymore. Sure, affordability is at an all-time high, sure mortgage rates are at record lows, and of course there are plenty of homes to choose from, but none of those are really juicing sales or prices.

Why? Patrick Newport of IHS Global Insight makes a really important point: "According to the Census Bureau, between March 2009 and March 2010, households rose by 357,000, the smallest increase since 1947. The previous year, households increased by only 398,000, the third smallest increase on record. These are steep drops from the 2002–07 period, when household increases averaged 1.3 million a year. Household formation is down because the jobs recession has reduced immigration and led to "doubling up".

And I haven't even talked about the foreclosure crisis yet.

"What the scandal does on top of the price declines is it gives people an incredible lack of confidence in the housing market," notes Marshall. "Folks that might have said now is the time to hop in, because prices are low, they are going to be hesitant. So not only do we have a financial problem but a consumer perception problem."

Come Monday, Bank of America and GMAC say they are starting up the foreclosure business as usual again (well perhaps, hopefully, not as usual), and we already know there were a record number of bank repossessions in September (102,000). So here come a whole new slew of homes onto an already bloated market where prices are falling, uncertainty is rising and confidence is non-existent. Do you want to talk about those Fannie Freddie scenarios again?

Questions? Comments? RealtyCheck@cnbc.com And follow me on Twitter @Diana_Olick