Mickey Levy, chief economist at Bank of America Corp. in New York, said the outlook for lower home prices remains a "gray cloud" hanging over U.S. financial markets.

"The uncertainty about how far house prices have to fall is the biggest gray cloud overhanging financial markets and financial institutions," Levy said Thursday in a Bloomberg Radio interview. "I think that gray cloud will start to lift early next year."

As the market values of Fannie Mae and Freddie Mac fall, the likelihood increases that the U.S. Treasury will need to save the government-chartered mortgage-finance companies.

"The Treasury has to come out with a meaningful, significant bail-out package that has an exit policy that has credibility in the marketplace," Levy said in Jackson Hole, Wyo., where he is attending the Federal Reserve Bank of Kansas City's annual conference.

"They're insolvent," he said of Fannie Mae and Freddie Mac. "Trouble is really brewing."