Fannie Mae still rates a `buy,' despite troubles

Taking Stock

Your Money

August 28, 2005|By ANDREW LECKEY

Q. I'm very concerned about my shares of Fannie Mae. What are the company's prospects?

- C.J., via the Internet

A. The largest U.S. buyer of home mortgages is trying to get its house in order. To accomplish this it must overcome its recent scandalous history of allegations of shoddy accounting and earnings manipulation that led to unbridled growth and the ouster of its management.

Shares of Fannie Mae (FNM) are down 28 percent this year, after last year's 5 percent decline. Fannie Mae is in the business of buying mortgage loans from banks, packaging them into securities and selling them into the market.

Regulators ordered this government-sponsored company to restate earnings back to 2001, a correction that could run as high as $11 billion. It recently said 2004 financial results won't be released until next year.

As it works toward a government-imposed Sept. 30 deadline to increase its capital reserves by 30 percent, Fannie Mae is reducing its mortgage loan portfolio and raising new capital by issuing $5 billion in stock.

Proposed legislation in Congress would overhaul the housing agency regulation governing Fannie Mae and its principal government-sponsored competitor, Freddie Mac, as well as reduce their mortgage portfolios.

After accounting problems came to light, Fannie Mae Chairman and Chief Executive Officer Franklin D. Raines was forced into retirement and Chief Financial Officer J. Timothy Howard resigned.

Daniel H. Mudd has been upgraded from interim status to Fannie Mae president and CEO. He was president and CEO of GE Capital, Japan, before joining Fannie Mae.

Even though its accounting records remain a quagmire and looming legislation seems likely to reduce its autonomy to some degree, Fannie Mae nonetheless performs a crucial financial function in the important housing market. Most investment analysts don't expect it to be dismantled.

Based on its reduced stock price, stock of Fannie Mae receives a consensus "buy" rating from analysts who track it, according to Thomson Financial.

Fannie Mae earnings are expected to decline 10 percent this year, versus an 11 percent increase projected for the credit-services industry.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney

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