Update II: "Fannie's And Freddie's Last Man Standing (FRE; FNM)"
Analysts at Keefe, Bruyette & Woods on Monday said the common shares of Fannie Mae and Freddie Mac are likely worthless even if the troubled mortgage-finance giants end up being recapitalized by the banking industry.
KBW analysts led by Bose George downgraded shares of Fannie Mae (FNM 1.23, -0.23, -15.75%) and Freddie Mac (FRE 1.50, -0.22, -12.79%) to underperform from market perform and cut their price target on both stocks to zero from $1.
"In order for the government-sponsored entities to survive going forward, we believe they need to be recapitalized through investments from the banks that benefit from their role in the secondary market," KBW wrote in a research note.
"In this scenario, both the common and preferred equity of the GSEs should be worthless," they said, adding that since being put into receivership last summer, the U.S. has put $98 billion of capital into Fannie and Freddie.
Shares of Fannie and Freddie were down more than 10% in early trading. Spokespersons for both firms didn't immediately return calls for comment on Monday morning.
"Fannie Mae and Freddie Mac have been at the heart of the U.S. housing boom, bust and recovery," KBW said. "As the mortgage market moves away from crisis mode, the future of the GSEs has to be addressed.">>>MORE