Fannie and Freddie Trade Gaining Analyst Respect

NEW YORK (TheStreet) --Fannie Mae (FNMA) and Freddie Mac (FMCC) common shares are gaining a shred of respect from "sell-side" analysts, as KBW's Bose George Tuesday raised his price target to $2 from $0 on both government sponsored entities (GSEs).

Fannie Mae common shares were down 7.71% to $3.47 in early trading Tuesday, while shares of Freddie Mac were down 7.49% to $3.46.

"We maintain our forward 2014 estimates and maintain our Underperform ratings but increase our price targets for both companies to incorporate the possibility of a combination of a legal victory for shareholders combined with a lack of action on both the regulatory and legislative fronts that hurts the value of the GSEs," wrote George.

George's price target is based on several assumptions, including what he sees as a 50% probability a controversial 2012 amendment to the government conservatorship on Fannie and Freddie that swept all their profits into the Treasury, minus small capital cushions, is overturned. Previously, the GSEs had to pay the government a 10% dividend. Other assumptions include a 25% probability that no GSE reform legislation is put in place, long term earnings of $1.72 for Fannie Mae and $1.65 for Freddie Mac, a 2.5% capital requirement for all guarantee assets and no reserve releases.

KBW's George may be the only equity analyst on the "sell side"--in other words working for a broker dealer rather than an investor--who has continued to cover the GSEs since they were put into government conservatorship in 2008. When I first asked him about the Fannie and Freddie trade in January 2011 he said he saw no value on a "fundamental basis." Still, even then he was willing to concede that trading the volatility in the shares might make sense.

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