The federal government may need to spend upwards of $700 billion to resolve Fannie Mae and Freddie Mac and then create a new government "entity" to replace them, according to a report from Standard & Poor's.

S&P also offered this sobering assessment of the U.S. mortgage market: without federally backed GSEs, the nation's residential market will be unable to "operate normally without continuing and substantial government involvement."

The rating agency says the total cost to resolve Fannie and Freddie could cost upwards of $280 billion (a figure that includes the $148 billion already given to them.) But the much larger cost involves establishing new GSEs and then capitalizing them, a number that may reach $420 billion.

"With a growing portfolio of unsold homes, a sluggish economy, stubbornly high unemployment, the prospect of rising foreclosures, and billions in legacy losses, it appears unlikely in our view that housing and mortgage markets will be able to operate normally without continuing and substantial government involvement," writes analyst Daniel Teclaw and two analysts.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.