Fannie Mae, Freddie Mac stock price targets cut to zero

Shares of mortgage finance companies Fannie Mae (FNM) and Freddie Mac (FRE) tumbled Monday after a Keefe, Bruyette & Woods analyst downgraded the two to the firm's lowest rating, saying their common and preferred shares would be "worthless" given the nearly $100 billion they will continue to owe the government, even if recapitalized.

Fannie shares fell 26 cents, or 17.8 percent, to $1.20. Freddie shares tumbled 31 cents, or 18 percent, to $1.41.
The two government-sponsored enterprises, or GSEs, buy up mortgages from banks. In order for them to survive, they need to be recapitalized, said analyst Bose George in a note to investors.

But he expects the government will continue to run the companies, and that 10 years from now, both will still owe the government more than the value of their common and preferred equity.

KBW downgraded Fannie and Freddie to "Underperform," its lowest rating, from "Market Perform" and cut price targets on both stocks to zero from $1.

"Our change in ratings and price targets today is primarily being made to make them consistent with the outcome that we are expecting for the companies: that they become government-run organizations and their current shareholders will not get anything in the end," George added.

Fannie and Freddie shares have been very volatile. For about a month starting in late July, the two stocks rose sharply despite analysts' warnings that the shares were worthless due to the huge debt to the government - about $98 billion, George said Monday - amid growing homeowner defaults and losses on guaranteed loans. For the month of August, Fannie shares had average volume of about 5.4 billion.

Activity tapered off in fall. Thus far in October, for example, Fannie's average trading volume is nearly 538 million shares. The stock is down about a third from its peak in August.

Also on Monday, the Obama administration announced more support for state and local housing agencies' efforts to help low-income homeowners get affordable mortgages. The program would support low mortgage rates through bond purchases and a temporary liquidity facility, provided by Freddie and Fannie, for the housing agencies.

But state agencies are small players, George said in an interview, and while the new program may help mortgage availability at the state level, it "doesn't directly do a whole lot for the outcome of the GSEs right now."

Copyright 2009 The Associated Press. All rights reserved.

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