Investors Take Fannie Mae Loss in Stride
Posted on: Wednesday, 7 May 2008, 06:00 CDT
By John Waggoner
Despite dismal losses, a gloomy outlook and a downgrade from Wall Street's credit analysts, Fannie Mae stock soared nearly 9% on Tuesday as investors cheered the company's efforts to right itself.
The mortgage giant's first-quarter earnings statement, issued early in the day, was a litany of woes, starting with its $2.2 billion loss in the first three months of this year. It was the company's third-consecutive quarterly loss.
Concerned about the possibility of a deeper-than-expected downturn in the housing market, Moody's Investors Service downgraded Fannie Mae's financial strength rating. Standard & Poor's placed some of Fannie's debt on negative credit watch.
Fannie Mae announced it would cut its quarterly dividend to 25 cents from 35 cents. It also said it would raise $6 billion by issuing more stock. Wall Street usually reacts negatively when a company cuts its dividend. And investors rarely like it when a company issues more stock, making existing stock less valuable.
But worries about the housing market -- and Fannie Mae's ability to withstand more losses -- have weighed heavily on the stock. The company's moves to shore up its balance sheet apparently impressed investors: Fannie Mae shares gained $2.52, up 8.9%. "Equity holders want a company with strong capital," says Victoria Wagner, credit analyst for Standard & Poor's.
In addition, both Fannie Mae and its rival, Freddie Mac, could be well positioned if the housing market recovers. The companies buy mortgage loans from banks, and package them into securities for resale. They also buy mortgages for their own portfolios.
Other companies have fled the mortgage-backed securities business, Wagner says. "They're the only game in town," she says.
When the housing market recovers, Fannie Mae is "poised to take a bigger market share," says mortgage industry consultant Howard Glaser.
In addition, the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, said it would lower the amount of reserve capital they need to hold, which would allow them to purchase more mortgages.
But some worry that the downturn will be longer and deeper than expected. "Financial people want to be positive; they think Fannie and Freddie will save the world," says Paul Miller, managing director at investment bank FBR Group.
But even if Fannie Mae's new mortgage acquisitions are good, its current holdings "could be a drag on the company's earnings for years," he says. And even Fannie's outlook for the housing market is far from rosy. The Washington, D.C.-based company said it expects home prices to fall another 9% this year.
Source: USA TODAY
User Comments (0)
RSS Feeds