Fannie Earnings Preview: Expect a Dividend Cut

On Wednesday 08/06/08, mortgage guarantor Freddie Mac (NYSE: FRE) reported earnings that came in almost four times worse than what analysts were expecting. Freddie Mac’s net earnings per share was $1.63 vs. the $0.41 that the street was looking for. The poor earnings report shaved 19.28% off the company’s market cap, with the stock closing at $6.49, down $1.55 on the day. It was the worst performer among S&P 500 stocks.

Somehow, the company’s bad fortunes did not create a drag on the rest of the financial sector and the stock market, as represented by the Dow Jones Industrial Average, was able to follow through on yesterday’s 331-point gain, with a modest 40.30-point gain on Wednesday.

On Friday, it will be Fannie Mae’s (NYSE: FNM) turn. The company will be reporting second quarter 2008 revenues, as well as the dividend rate for the third quarter. Considering that FNM is under severe financial pressure and that FRE, along with reporting horrible earnings, also announced a quarterly dividend rate cut from $0.25 per share to $.05 or less per share, it is probably a safe assumption that FRE will announce a dividend rate cut as well, in a bid to preserve capital.

For the second quarter of 2008, analysts are looking for a quarterly loss of $0.69. For the same period last year, the company earned $0.49 per share. Revenues are expected to come in at $3.4 billion, compared to $3.42 billion in the same period last year.

The company may very well report an impressive increase in interest income and revenues. However, credit related write-downs will most likely wreak havoc on its financials. Additionally, the company will also probably report a rising delinquency rate and an increasing number of homes that it has had to take over in foreclosures. In May of last year, Fannie’s serious delinquency rate on single-family homes was 0.34%. In May of this year, that number had more than doubled to 0.71%.

Fannie Mae, in sympathy with Freddie Mac, lost 14.71% of its market cap on Wednesday. The stock dropped $2.00, to close at $11.60. In anticipation of the earnings, it seems the best shareholders can hope for, is that the stock rallies strongly on Thursday, so that if it does drop on Friday on the earnings, it won’t be so bad.

On July 11, the stock hit a fifty-two week low of $6.68. It could be looking to test those levels again, on the back of the quarterly earnings that the company is about to report.

Comments

[NormanCI:]

As a licensed mortgage broker in Florida for years I had been shaking my head in bewilderment at the offers being sent me by lenders.
They seemed to feel that a rate increase compensated them for the extra risk involved with low or no down payments, poor credit and no proof of income.
This was obviously nonsense as the credit market has now found out.
20 years ago there was the RTC bailout of Savings and Loans, but no lessons were apparently learned.
Here are lessons one, two and three for any bankers who may be reading:

1. The yield doesn't matter if you're not going to get paid anything.
2. Never follow other lenders into stupid loans just because you don't want to lose market share.
3. If you give a teaser rate loan and you know perfectly well the payments are going up in a couple of years, make sure your borrower's income is enough to cover THOSE payments, not just the current ones.
Duh!

2008 Aug 07 08:22 AM