Freddie Mac Sees Home Prices Sliding and Asks for More Cash

Freddie Mac (FRE) doesn't expect a housing recovery any time soon. In fact, the government-backed mortgage-finance giant thinks home prices will fall further before they start climbing back up. Worse, Freddie says it now needs an additional injection of $10.6 billion of government funding.

The primary force behind the price declines, according to Freddie's most recent filing with the Securities and Exchange Commission, is the April 30 expiration of the federal homebuyer tax credit. The mortgage guarantor thinks home sales will slow as a result of the expired government credit. It also forecasts a "significant increase in distressed sales," including foreclosed homes, preforeclosure sales and sales of bank-owned properties. And of course, unemployment will remain a "key risk," according to the filing.

"Our assumption for home prices, based on our own index, continues to be for a further decline in national average home prices over the near term before any sustained turnaround in housing begins," the company wrote in the document.

Recent Price Gains Have Evaporated

Freddie Mac's assessment mirrors the opinion of many housing experts who predict that residential real estate is headed -- or has already fallen -- into a double dip, that is, a second round of home price declines. The problem, according to many economists, is that unemployment is still lingering at a hefty 9.7%, and there's little hope for dramatic job growth in the near future (though hiring is now certainly stronger now than it has been since the Great Recession struck). As conventional wisdom would suggest, unemployed homeowners are less likely to make payments on their homes than those with jobs.

Last month, the S&P/Case-Shiller Index showed that price gains that had been achieved at the beginning of last November had evaporated, and in some cities had fallen to their lowest levels since peaking three or four years ago.

"These data point to a risk that home prices could decline further before experiencing any sustained gains," said David Blitzer, chairman of the Index Committee at Standard & Poor's, when the last report was released.

More Losses Ahead

Freddie Mac estimates that first-quarter home prices for its single-family guarantee portfolio slipped 0.9%, and overall, the company went from having a net worth of $4.4 billion for the fourth quarter of 2009 to a first-quarter 2010 deficit of $10.5 billion. Total equity slipped to a deficit of $11.7 billion.

Regardless of where home prices go, the company expects its credit losses will likely remain "significantly above historical levels for the foreseeable future," mostly because of all the "underwater" homeowners -- borrowers who owe more on their homes than their homes are actually worth.

As a result of the $10.5 billion deficit, Freddie Mac has asked the government to hand over some more cash -- roughly $10.6 billion. Freddie expects to receive the funds by June 30.

Since November 2008, Freddie Mac has accepted at least $50 billion in bailout funds from the government. By the Wall Street Journal's account, Freddie Mac and Fannie Mae have collectively asked for nearly $126 billion.