Friday, July 11, 2008

Fannie (NYSE:FNM) and Freddie (NYSE:FRE): Wild Week For GSE Shares, No Change in Fundamentals, Just Sentiment - Piper

Piper Jaffray is out with defending comments on Fannie (NYSE:FNM) and Freddie (NYSE:FRE) this morning noting GSE shares have gotten pummeled this week with FNM shares -30% and FRE -45%

Interestingly, there has not been one significant piece of macroeconomic or company specific news on either company to drive the decline, in firm's view. They believe FNM will likely not need new capital unless credit losses rise to over 40 bps, which would be about triple current levels.

The drop began on a bullish competitor's speculative note on capital and proposed FASB accounting changes (dispelled by the regulator). FNM/FRE's regulator, OFHEO, put out a press release last night saying "they are adequately capitalized with capital well in excess of OFHEO-directed requirements, have large liquidity portfolios, access to the debt market and over $1.5 trillion of unpledged assets." Piper doubts anyone will listen as fear is so high. They remain cautious with Neutral ratings on the GSEs due to concerns about credit. Firm notes that to upgrade, they need to get some confidence in the peak in credit losses, which they have not been able to do yet. Still, they have been surprised by the decline in FNM and FRE, as there has not been one significant piece of fundamental data to drive the decline.

The bigger decline for FRE is due to the fact that they have not raised capital (FNM recently completed a $7.4 billion financing), which they believe could make FRE capital ratios close to regulatory minimums by year end '08 unless they slow the growth of the portfolio

Firm is is lowering their price target from $30 to $15, which is based on 6x their '10 estimate of $2.50. This multiple is well below historical levels (12x is the 10yr median P/E multiple) due to the lack of visibility on peak credit losses.

They are lowering their price target on FRE from $28 to $9, which is based on 4x '10 estimate of $2.20.

Notablecalls: We have NYT reporting the U.S. government is considering taking over mortgage finance companies Fannie Mae and Freddie Mac if their funding problems worsen, in a plan that could leave shareholders nothing, citing people briefed on the matter.

These are pretty harsh statements that will likely send the shares down some more this morning. Yet, as Piper Jaffray notes, things are not as ugly as the media indicates.

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