Like all well-run businesses, the federal government has a worst, best, and middle case for the cost to bail out Freddie Mac and Fannie Mae. The range is from $221 billion to $363 billion, according to the Federal Housing Finance Agency which oversees both entities.

The Treasury has made a great deal of noise about the news that TARP may only cost $30 billion after the government gets a return on its support of banks, American International Group (NYSE: AIG), GM, and Chrysler. Although they are not part of the TARP program, that number would be eclipsed by the bailout of the two housing agencies.

Looked at another way, the salvation of Fannie and Freddie could cost as much as half of the entire $787 billion Obama stimulus package.

The loss projection covers the period from 2008 to 2013. The major difference between the high and lows cases is the cost of housing. Based on that foundation, taxpayers should brace themselves for the worst.

According to the FHFA:

The purpose of this report is to provide the public with information on possible future Treasury draws by Fannie Mae and Freddie Mac (the “Enterprises”) under specified scenarios, using consistent assumptions for both Enterprises. FHFA will periodically update and refine these projections and will report such updates as part of its Conservator’s Report.

To date, the Enterprises have drawn $148 billion from the U.S. Treasury under the terms of the Senior Preferred Stock Purchase Agreements (PSPAs), as amended, between the Treasury and each of the Enterprises.

To provide a sense of the Enterprises’ possible future draws under the PSPAs, FHFA worked with the Enterprises to develop consistent forward-looking financial projections. The results do not define the full range of possible outcomes. This effort should be interpreted as a sensitivity analysis of future draws to possible house price paths.

Most experts believe that the government has no choice other than to go through with the investment, which will cover the next two years. In reality, it is impossible to imagine that there are any alternatives.

Fannie Mae and Freddie Mac hold or back more than half of the mortgages in the US. If the government withdraws support from the firms, the housing market would go through yet another collapse. The two firms would have little option other than liquidation, which would not be orderly without federal support.

The bad news for the taxpayer is that there is little evidence that the housing market is improving.  Moreover, the present mortgage crisis and unemployment could continue to erode prices. There has been a “buyer’s strike” in housing because such a large number of potential homeowners believe prices could still drop. Homes which have been foreclosed upon may go into limbo as the mortgage paper work scandal grows. Eleven million mortgages, over 20% of the US total, are underwater, meaning their owners would have to pay banks to sell the homes.

As the economy continues to soften and unemployment hovers near 10%, there is little hope that housing will rebound enough to help the two agencies to recover losses. The taxpayer was just handed another large bill.

Douglas A. McIntyre

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