Ahead of the Bell: Fannie Mae, Freddie Mac

posted: 36 DAYS 4 HOURS AGO

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NEW YORK -Keefe, Bruyette & Woods downgraded mortgage finance companies Fannie Mae and Freddie Mac Monday, saying their common and preferred shares would be "worthless" given the nearly $100 billion they will continue to owe the government, even if recapitalized.

In order for the government-sponsored enterprises, which buy up mortgages from banks, to survive, they need to be recapitalized, said analyst Bose George in a note to investors. He suggested doing so through equity investments from the banks originating Fannie- and Freddie-backed loans.

But he expects the government will continue to run the companies, and that 10 years from now, both will still owe the government more than the value of their common and preferred equity.

KBW downgraded Fannie and Freddie to "Underperform," its lowest rating, from "Market Perform" and cut the price target on both stocks to zero from $1.

"Our change in ratings and price targets today is primarily being made to make them consistent with the outcome that we are expecting for the companies: that they become government-run organizations and their current shareholders will not get anything in the end," George added.

Fannie and Freddie shares are very volatile. Over the summer, they inexplicably quadrupled in value. The stocks have been trending lower throughout fall.

2009-10-19 08:19:55