Shares in Fannie Mae and Freddie Mac surged on Tuesday after Citigroup analysts said the two government-sponsored mortgage financiers could withstand losses up to the end of the year and an imminent government rescue was unlikely.
Brad Ball, analyst at Citigroup, recommended the stock of both government-sponsored mortgage financiers. Shares in Freddie rose by 22.19 per cent and Fannie was 13.10 per cent higher in morning trade, leading stock markets higher.
Mr Ball said that both companies’ stock prices were so low that the potential rewards were “attractive” if the two companies pull through the housing crisis. He said both Fannie and Freddie’s capital positions had a substantial cushion above their regulatory minimum, and their continued access to the debt markets meant the odds of an aggressive government intervention were 1 in 10.
Freddie has $12.7bn of capital above the minimum requirement, while Fannie has $20.3bn, said Mr Ball, which should absorb losses for the companies to the end of the year, giving them some breathing room to raise additional capital.
Citi’s comments came after Freddie Mac on Monday easily sold $2bn of short-term debt, helping to reassure stock markets that Freddie and Fannie could still fund their operations without a government rescue. Fannie Mae was expected to conduct a similar sale on Tuesday.
Fannie has a preferred (FNA 14.45) that also gives good action.
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