Fannie, Freddie Tumble on Capital Worries

Shares of Freddie Mac and Fannie Mae tumbled more than 40 percent Friday as Wall Street continued to worry about the health of the mortgage companies and the potential for a government takeover.

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"We should not be in a position that only two government-sponsored lenders are willing to make mortgage loans and, without them, our economy would collapse," Piper Jaffray analyst Robert P. Napoli said in a note to clients.

Napoli lowered his target on Freddie to $9 from $28 and on Fannie to $15 from $30. He kept "Neutral" ratings on both companies, citing credit concerns.

There does not appear to be a change in fundamentals at either company, he said, just a change in sentiment.

Thursday night the Office of Federal Housing Enterprise Oversight said both Fannie and Freddie remain "adequately capitalized" and "have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets."

Yet Napoli said, "We doubt anyone will listen as fear is so high." He estimated that Freddie will likely have $2 billion in excess capital by the end of 2008 and Fannie will have $6 billion by the end of 2009.

Friedman, Billings, Ramsey & Co. analyst Andrew Parmentier said the question of a capital raise at either company remains a "moving target."

"In an instance where equity capital is not raised and investors see a meaningful change in debt spreads, it is clear to us that government action would be undertaken to ensure that the institutions would not fail," Parmentier said in a note to clients.

So far this year, shares of Freddie are down 77 percent, and shares of Fannie are down 67 percent.

Representatives from neither company were immediately available for comment.

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