Fannie and Freddie Stumble After Downgrade

November 26, 2007 No Comments »

Both Fannie Mae and Freddie Mac were downgraded Monday on concerns that bad loans will ravage their portfolios over the next couple years.

UBS Investment Research analyst Eric E. Wasserstrom downgraded Fannie and Freddie to “neutral” from “buy,” and cut his price target on Fannie to $31 from $88, and Freddie to $28 from $87.

Last week, Freddie Mac revealed a $2 billion third quarter loss and said its regulatory surplus fell to its lowest level in seven years, forcing the financier to raise capital through the sale of preferred stock.

Fannie Mae, the larger of the two government-sponsored entities, reported a third quarter loss of $1.52 billion and is under similar pressures.

“Fannie Mae is less subject to (mark to market) credit risks than Freddie Mac but is suffering from an increase in charge-offs and delinquencies,” the report said.

The UBS report said both Fannie Mae and Freddie Mac will face significant charges due to increased borrowing costs and mortgage losses through 2008 as well as 2009.

Fannie Mae and Freddie Mac own or guarantee roughly 40 percent of the $11.5 trillion U.S. residential mortgage debt.

Fannie Mae ended the day down $3.28, or 10.19% to $28.92, while Freddie Mac fell $1.97, or 7.44%, to $24.50 in trading Monday on Wall Street.

Both government-sponsored entities have been flirting with 10-year lows over the last week and change.

Update: Freddie Mac cut its dividend in half and unveiled plans for a $6 billion preferred stock sale.

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