"No Fundamental Value" For Fannie Mae (FNM) and Freddie Mac (FRE) - Analyst
FBR Capital is reiterating their Underperform rating on Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) following the recent run-up in the shares. The firm believes there is no fundamental value remaining in FNM and FRE, particularly since the government owns 80% of each company.
The analyst commented, "To date, Uncle Sam has invested $96.3 billion in the GSEs, and we expect more government capital injections in the coming quarters. FNM and FRE shares have moved materially in the last two weeks on speculation that a reverse stock split will take place. However, we would note that even in the GSE's regulatory filings, the companies point out that their management teams are not in favor of reverse stock splits, despite the potential for the shares to be delisted from the NYSE. However, the boards of directors and regulators will impact the decision, and to our understanding, the decision on a potential reverse stock split has not been made. In our opinion, the regulators will not want to create a false sense of value in FNM and FRE shares and will likely shy away from reverse stock splits."
The firm said the most likely scenario is that the GSE's operations will be split up, and Fannie and Freddie will be spun out of the government as mortgage insurers with small portfolios; the majority of the portfolio would likely remain in the government's hands.
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