UBS Cuts Fannie, Freddie View to Neutral

UBS Investment Research on Monday lowered its view of Fannie Maeand Freddie Macto a "neutral" rating from a "buy," citing an increase in U.S. mortgage losses and slipping value of their other home loan investments.

Fannie Mae shares slipped 9.41 percent.

Freddie Mac shares fell 7.93 percent.

Both stocks, which trade on the New York Stock Exchange, hovered at 10-year lows last week.

In its research note, UBS slashed its target price for both companies by about two-thirds setting its Fannie Mae price target at $31 and its Freddie Mac price at $28.

Marshall Front, chairman of Front Barnett Associates, of Chicago, said both companies are being punished for uncertainty in the mortgage market.

"There are uncertain values for some of their securities and they face uncertain write downs in the next quarter," he said. "Those are big questions and (it) explains why Fannie and Freddie are getting thrown out the window."

Front said his firm recently bought a stake in Fannie Mae but does not own an interest in Freddie Mac.

While Fannie Mae and Freddie Mac generally turned their backs on risky subprime loans that ballooned during the housing boom, both companies have been hurt lately as even strong borrowers are facing foreclosure.

The nation's two largest sources of mortgage finance have similar exposure to failing loans, but Freddie Mac is under more acute pressure. The company must raise $6 billion to $8 billion in new equity through preferred stock issuance, UBS Investment Research's report said.

"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 states that Fannie Mae and Freddie Mac will both face significant charges with increased borrowing costs and mortgage losses through 2008 and even into 2009.

Both firms are also hampered by current orders from their regulator to hold a 30 percent larger capital cushion against possible losses. That demand, put in place after accounting scandals shook both companies, is expected to be lifted early next year.