Fannie sinks on downgrade

Analyst slashes mortgage financer's stock grade, saying plans to raise capital will dilute the company's earnings down the road.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Mortgage finance giant Fannie Mae tumbled in Monday trading after an analyst downgraded the stock, cut the price target and slashed earnings estimates for the company.

Shares of the government-sponsored enterprise fell 87 cents, or 9.6%, to $8.18 Monday.

In a client note Monday, Keefe, Bruyette & Woods analyst Frederick Cannon cut Fannie's stock rating and slashed his price target to $10 from $48.

The analyst cut his financial results estimates for the mortgage financier, predicting a $1-per-share loss in the third quarter. Cannon also said he now forecasts a $7-per-share loss for all of 2008 and a per-share loss of $1.50 for 2009.

The downgrade comes less than two weeks after President Bush signed a comprehensive housing rescue bill, which included the provision of temporary authority for the Treasury to lend a financial hand to Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) if the Treasury deems it necessary to help stabilize markets.

"The benefit to Fannie Mae from widening credit spreads is limited and capital raises are dilutive to future earnings," Cannon said in his analyst note.

On Friday, Fannie Mae reported a much larger-than-expected $2.3 billion loss in the second quarter and slashed its dividend.

The company signaled that its loss rate on its business will double in the second half of the year, and that it will see huge losses through next year because of the continued decline in home prices and rising mortgage foreclosures and delinquencies.

"A significant downturn in housing, with national home prices falling 20% or more would create meaningful risks [for Fannie]," said Cannon.

Freddie Mac shares were 5% lower in midday trading. To top of page

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