Analysts brace for Fannie Mae, Freddie Mac losses
NEW YORK |
NEW YORK Feb 25 (Reuters) - Investors fear Fannie Mae and Freddie Mac will report another quarter of losses this week, making it difficult for the two biggest U.S. home financing companies to help rescue the housing market.
It has become clear to Wall Street analysts that the housing finance companies have not adapted to the rising number of U.S. mortgage defaults and the slump in house prices, even though regulators are turning to them to help stop foreclosures, boost refinancing, and recharge the mortgage securities market.
Brokerage downgrades of Fannie Mae FNM.N and Freddie Mac FRE.N are piling up among Wall Street analysts, with Fannie Mae forecast to report a fourth quarter loss of $1.8 billion on Wednesday, and Freddie Mac seen losing $2.1 billion when it reports on Thursday.
"They are just going to be very messy numbers" from the government-sponsored enterprises (GSE's) when they report their results, said Paul Miller, an analyst at Friedman Billings Ramsey in Arlington, Virginia.
Last November Fannie Mae "said things had not changed so far that quarter, and things got worse. And its even worse now" in 2008, Miller added.
The two companies were once-reliable profit generators with share prices trading well-above $60, but have turned into huge loss-makers that now trade under $30 since their stocks tumbled sharply last October.
Miller on Monday slashed his rating on Fannie Mae to "underperform" from "market perform." Earlier on Monday, analysts at Goldman Sachs Group Inc. cut Fannie Mae and Freddie Mac shares to a "sell" rating, citing credit losses and losses from interest-rate volatility.
Merrill Lynch & Co.'s Kenneth Bruce on Friday also told its clients to sell shares of the companies, noting that earnings could languish for years.
Investors in 2008 have become more bearish on mortgage credit amid signs the housing market is far from recovery.
Sales of existing homes fell for a sixth straight month in January, while prices tumbled, the National Association of Realtors said on Monday. For details see [ID:nN25232348].
Goldman Sachs said the U.S. is only halfway through the housing downturn that began more than a year ago. House prices have fallen 10 percent since their peak in early 2007, and will probably slide another 10 percent to 12 percent, it said.
Fannie Mae and Freddie Mac executives last week told Reuters they aren't counting on any turnaround in housing this year, and are prepared for a tough road ahead.
The companies took fewer credit risks than many of Wall Street investment banks that have reported more than $100 billion in mortgage-related losses, but they own billions of dollars in subprime securities, and housing market weakness has spread to more creditworthy borrowers counting on house price appreciation.
"We're leaning pretty hard into the headwinds to make sure that we are in a good strong credit, capital, safety and soundness position to get through this market," Fannie Mae Chief Executive Officer Daniel Mudd said.
Fannie Mae and Freddie Mac last quarter raised capital of $7.5 billion and $6 billion, respectively, to support their ability to serve the housing market through 2008.
But as the housing market has continued to deteriorate, they may be forced to ask for more capital to keep their levels above the regulatory minimums, Goldman and FBR said.
The GSEs, chartered by Congress to promote homeownership, must strike a balance between fulfilling their mandates and stemming losses to shareholders caused by loose lending and falling home prices. Congress this month hoped to give Americans in high-cost regions a boost by allowing the two companies to guarantee loans above $417,000 for the first time.
Their combined $4 trillion mortgage bond guarantee business has turned into one of the last outlets lenders can find to finance originations. Depleted capital levels at the GSEs could slow that service and bring U.S. housing to a grinding halt, analysts said.
"Headwinds" has become the buzzword for the GSEs and analysts, all of whom used the term in their downgrade reports this week.
Investors have taken the dour outlooks from Fannie Mae and Freddie Mac to heart so far this year, halving share prices on both since the report of third quarter losses in November. But analysts insist the drubbing still fails to address what's coming in Fannie Mae's fourth quarter report on Wednesday and Freddie Mac's on Thursday.
Goldman cut its price target for Fannie Mae by a third to $27 and for Freddie Mac by 19 percent to $22. Miller at FBR cut his expected valuation on Fannie Mae to $23 from $30.
- Tweet this
- Share this
- Digg this