|
A lender's market
|
 |
October 15, 2001: 7:12 p.m. ET
Low interest rates are fueling record profits for Fannie Mae and Freddie Mac.
By Michael Sivy
|
NEW YORK (CNNmoney) - Mortgage-finance giant Fannie Mae reported record third-quarter earnings before the market opened on Monday. Strong mortgage-refinancing business and fat lending spreads pumped up results, with earnings growth of 9.4 percent (or 22 percent for operating income excluding accounting charges), a hair above analyst estimates. For the year as a whole, analysts expect operating income to rise by almost 20 percent. And on Wednesday, Freddie Mac, Fannie Mae's brother in the mortgage-finance business, is reporting -- analysts expect a 24 percent gain in operating income.
Fannie Mae (FNM: up $1.52 to $78.95, Research, Estimates) and Freddie Mac (FRE: up $1.24 to $65.34, Research, Estimates) are government-sponsored companies that provide a secondary market for mortgages by buying, selling and guaranteeing such loans. Falling interest rates help these mortgage-finance companies by increasing their profit margins -- the spread between what they pay for money and what they earn on the loans they make. Currently, those lending spreads are up by more than 10 percent since the Fed began slashing short-term interest rates in January.
In addition to boosting margins, low interest rates encourage homeowners to refinance their existing mortgages. That creates new loans for Fannie Mae and Freddie Mac to package, and also adds to the lenders' fee income. Such refinancing activity has been strong all year long.
In such a basically favorable environment, both stocks have gained more than 12 percent over the past 52 weeks. The stocks sold off a little after Sept. 11, but have now recovered and both are up a buck since I wrote about them in August.
Since it appears that the economy is now in recession and that the Fed will cut interest rates as low as they can go before the end of the year, some investors worry that demand for mortgages will weaken early next year. But such concerns seem to be overblown. Homeowners often wait as long as a year after rates drop to roll over their mortgages (see "Can you still refinance"). Moreover, interest rates are down to their lowest levels in nearly four decades, so the volume of refinancings still to come is potentially enormous.
Even if earnings growth at Fannie Mae and Freddie Mac does slow a little next year -- down from almost 20 percent to the low teens, say -- it will still be better than what most other companies offer. And growth should rebound as soon as the economy recovers. Over the next decade demand for mortgages will continue to increase steadily thanks to population increases, the trend toward smaller households,and the long-term rise in real estate prices.
Earnings per share for both companies are projected to grow at a 14 percent annual rate over the next five years. And despite solid performance throughout the bear market, both stocks are still quite cheap. Fannie Mae, at $79 a share, trades at 13.5 times next year's estimated results, while Freddie Mac, at $65.35, goes for a 13.7 P/E. Even in this depressed market, you've got to like successful companies with P/Es lower than their growth rates. 
|
|
|
|
|
 |
|
