By ,
Published January 14, 2015
Fannie Mae (FNM) shares rallied Wednesday, a day after two top executives stepped down at the No. 1 mortgage finance company, but analysts warned that possible regulatory changes could threaten its profits.
"They are far from out of the woods. It is the beginning of a change in their culture," said Josh Rosner, an analyst at Medley Global Advisors, whose clients include mutual and pension funds.
Early Wednesday, Rosner warned in a report that "while we would not be surprised if investors bid up Fannie's equities this morning ... we believe this to be overly simplistic and premature."
Fannie Mae rose $1.63, or 2.3 percent, to $71.98 on the New York Stock Exchange (search). In the past 52 weeks, the shares have traded in a range of $62.95 to $80.82.
Fannie Mae's stock is down nearly 4 percent this year, lagging the performance of all but six of the 82 financial stocks in the Standard & Poor's 500 index. The S&P is up 8.7 percent this year, and the financials group is up 8.2 percent.
On Tuesday, Fannie Mae's board said Chief Executive Franklin Raines (search) was retiring and Chief Financial Officer Timothy Howard (search) was resigning.
The announcement came after months of scrutiny of Fannie Mae's accounting. Last week, the Securities and Exchange Commission (search) determined that the government-sponsored enterprise (GSE) would have to restate its results and correct substantial errors in its financial reports.
The magnitude of the restatement, though not yet clear, is expected to be in the billions of dollars. The company's regulator, the Office of Federal Housing Enterprise Oversight (search) (OFHEO), earlier said it was working on a capital restoration plan as part of reforming Fannie Mae.
Jonathan Gray, analyst at Sanford C. Bernstein & Co., on Wednesday cut his target price on Fannie Mae to $84 from $86.
Given Fannie Mae's undercapitalization and the animosity between the company and OFHEO, Gray said Bernstein considered it a serious risk that Fannie Mae will be forced to discontinue its common stock dividend, at least for the next two quarters.
With a current quarterly dividend of 52 cents on 970 million shares outstanding, Fannie Mae's dividend payments add up to about $1 billion over two quarters.
"While the stock may trade up on the belief that the ousting of management will help settle the political/regulatory uncertainty more quickly, we caution investors that there may be other shoes to drop," Gray wrote in a research report.
Moreover, he said, "the SEC's finding of accounting non-compliance and the removal of management may embolden the GSEs' adversaries in Washington to more aggressively pursue restrictions on the companies."
Fannie Mae and smaller counterpart Freddie Mac sell guarantees for timely payment of home loans. These guarantees allow mortgage banks to sell the loans as bonds on Wall Street. Fannie and Freddie sell securities known as agency debt that allow them to buy mammoth quantities of home loans and mortgage bonds for their own portfolios -- a key source of profit.
Regulatory changes that could limit Fannie Mae's profits include putting a cap on debt sales to finance mortgage loans and bond purchases, according to analysts like Rosner.
They may also ask that Fannie Mae suspend its dividend until its financial condition improves.
"We expect OFHEO to argue that not paying dividends for two quarters would hasten the company's return to adequate capitalization and improve the odds of complying with the 30 percent surplus by mid-year 2005," said Gray.
Some shareholders appeared nonplused by expectations of Fannie's massive financial restatement.
David Dreman, chief investment officer at Dreman Value Management where his $11 billion portfolio includes Fannie Maeshares, said the company's multibillion dollar losses will be readily absorbed. "It is pretty unlikely there are serious problems here above and beyond what's being aired now," he said.
https://www.foxnews.com/story/fannie-mae-shares-rally-after-exec-ouster