Fannie, Freddie take another fall

Investors dumped shares of Fannie Mae (FNM) and Freddie Mac (FRE) Friday after a Wall Street analyst warned that both stocks could hit new lows as investors come to appreciate the depth of problems in the financial sector. Merrill Lynch analyst Kenneth Bruce downgraded, to sell from neutral, shares in the government-sponsored mortgage firms, saying, “we think further deterioration in financial market conditions and worsening credit performance will undermine fundamentals and the market’s assessment of their respective financial position, likely leading to further valuation compression.”

Valuations have already been greatly compressed at Fannie and Freddie, with both stocks down more than 60 percent from their highs ahead of last summer’s credit crunch. But Merrill expects fair value book value - a measure of the companies’ net worth - to fall sharply when fourth-quarter numbers come out later this month, as the companies take mark-to-market writedowns of their mortgage securities holdings. He adds that the shares could languish for years to come, given the prospect that a “tepid earnings recovery” will combine with a downturn in sentiment as “market participants capitulate on the quick recovery in mortgages.”  Early Friday, Fannie was down 5 percent and Freddie was off 8 percent.