Oct. 19 (Bloomberg) -- Fannie Mae and Freddie Mac each fell 22 percent, to the lowest prices since August, after analysts at KBW Inc. said the shares of the government-run mortgage finance companies are probably worthless.
Analysts led by Bose George cut the companies’ price targets to zero today from $1 set in April, saying the entities need to be recapitalized by mortgage banks that use their services.
Fannie Mae fell 32 cents to $1.14 at 4:15 p.m. on the New York Stock Exchange, the lowest price since Aug. 20. Freddie Mac fell 37 cents to $1.35, the lowest since Aug. 19.
The government-sponsored entities, which more than tripled in August, have retreated from 13-month highs of $2.40 for Freddie and $2.04 for Fannie on Aug. 28.
“Both the common and preferred equity of the GSEs should be worthless” if the companies are recapitalized, the analysts wrote in a research note. The companies “are acting as a direct arm of the federal government providing massive federal aid to support and revive the U.S. housing market in the midst of a crisis,” the report said.
Fannie Mae and Freddie Mac remain the two largest sources of housing money in the U.S., financing about 70 percent of new mortgages, according to government statistics. Regulators seized their operations and placed Fannie Mae and Freddie Mac into conservatorship in September 2008 amid fears that the two were failing and posed a risk to the broader U.S. economy.
Recapitalizing Fannie, Freddie
The Congressional Budget Office projects the two will require $389 billion of the $400 billion in taxpayer aid Treasury pledged last year to keep them solvent.
“The only viable option to limit taxpayer expense and recapitalize Fannie Mae and Freddie Mac is to set up a Bad Fannie and Bad Freddie,” KBW said, adding that the plan would wipe out existing common and preferred shareholders.
The government could spin off new companies that are cooperatively owned by mortgage banks such as Wells Fargo & Co. and Bank of America Corp. that sell loans to Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, mirroring the Federal Home Loan Bank system, the analysts wrote.
The companies have booked a combined $165.3 billion in net losses during the past two years and have received or requested $95.6 billion in taxpayer aid since November.
