Fannie and Freddie Downgraded

November 12, 2007 No Comments »

Both Fannie Mae and Freddie Mac were downgraded Monday by Lehman Brothers analyst Bruce Harting as falling home prices and delinquency trends continued to worsen.

The news came just days after Fannie Mae announced a $1.4 billion third-quarter loss and forecast a 4 percent drop in home prices in 2008.

Harting cut his rating on Fannie Mae to “Equal Weight” from “Overweight” and slashed his price target to $46 from $67.

“The question is what ultimate losses will be at Fannie Mae, which still seems highly uncertain given we are still in the early throws of the housing downturn and it seems like management’s forecasts for housing and credit trends are not overly conservative,” Harting wrote in a client note.

The Lehman Bros. analyst noted that Fannie’s delinquency trends were deteriorating in the Midwest and in hot spots such as California, Florida, Arizona and Nevada.

He also cut his rating on fellow mortgage financier Freddie Mac to “Equal Weight” from “Overweight” and cut his price target to $42 from $60 based on the same criteria.

Friedman, Billings, Ramsey analyst Paul Miller also cut his price target on Fannie Mae to $60 from $85 on housing market concerns and higher credit costs.

“We now believe the impact of rising credit cost will outweigh earnings growth in the guaranty business in the next few quarters,” Miller wrote in a note to investors.

Shares of Fannie Mae were trading down $1.12, or 2.29%, to $47.88, while Freddie Mac was down $1.72, or 4.12%, to $39.98.

Both government-sponsored entities are trading well below their 52-week highs of roughly $70.

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