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July 21 (Reuters) - The U.S. government sponsored enterprises (GSEs) will need to raise $10 billion to $15 billion each, said an analyst at Friedman Billings Ramsey, who expects Fannie Mae FNM.N and Freddie Mac FRE.N stocks to see continued volatility until they raise fresh capital.
“The best solution for everyone is for the GSEs to raise fresh equity to strengthen their balance sheets and continue to buy mortgages in order to stabilize the housing markets,” analyst Paul Miller wrote in a note to clients.
“The current GSEs’ capital rules are outdated, based on low levels of historical losses on mortgage assets,” he added.
The analyst expects the GSEs’ likely capital raise to be in $5 billion to $10 billion increments, depending on the size and timing of losses on the mortgage finance companies’ credit book.
“While we have always been concerned about capital adequacy, we believe the recent share price declines will result in significant dilution with further capital raises,” Miller said.
Investors sensing the need for Freddie Mac and Fannie Mae to raise capital, which would dilute existing shares, sent the companies’ stock prices down 44 percent and 31 percent, respectively, this month.
“We believe most investors are valuing the GSEs on future earnings potential in 2010 to 2011, but, in our opinion, this is a risky investment policy, and there are too many unknowns with credit losses and possible future capital raises,” Miller said.
The analyst lowered his price target for Freddie Mac to $7 from $17, and for Fannie Mae to $11 from $23. He maintained his “underperform” rating on both stocks.
Shares of Freddie Mac closed at $9.18 Friday on the New York Stock Exchange, while those of Fannie Mae closed at $13.40. (Reporting by Tenzin Pema in Bangalore; Editing by Amitha Rajan)