The U.S. Treasury’s decision to takeover troubled lending giants, Fannie Mae and Freddie Mac, doesn’t do much to lift the gloomy outlook for the U.S. economy, nor is it likely to make things easier in the U.S. banking industry, according to a special report from TD Economics.

The report allows that the de facto government takeover of Fannie and Freddie “removes a large downside risk from the table,” however TD says that its forecasts assumed a negligible chance that these agencies would be allowed to fail, and it was expected that a bailout of this magnitude would be needed. “Therefore, this does little to change our U.S. economic forecast,” it says.

“This was a necessary action to reconstitute the financial system. But, it does not change the recessionary dynamics underway, it does not change the need for a further 5-10% drop in home prices over the next year to work off the large inventory of homes, nor do we think the impact on mortgage rates will be enough to make potential homebuyers reenter the market and look past the expectation for ongoing home price declines,” it stresses.

Indeed, the U.S. banking industry still faces a stiff headwind, TD warns. “At the end of the day, the economy is becoming a more important driver of new delinquencies, defaults, and credit tightening. Rising unemployment and falling employment means those that could have afforded their mortgage, no longer can once their job and source of income is gone. In turn, this puts further pressure on banks balance sheets, further limits the available funds for lending, and exacerbates the credit tightening driven by the credit crunch,” it explains.

TD says that there is still “a tremendous risk” that some regional banks won’t be able to generate enough new mortgage business to remain solvent. It notes that so far, only about 10 banks have failed, but this could increase tenfold or more over the next several years, it warns.

“Moreover, this action has shown no impact on the high cost of bank funding… and the need to account for rising default rates on all types of loans. The mountains to climb in this regard remain steep,” TD concludes.