Before the housing crises is over, Freddie will either be bankrupt and bailed out by the US gov't, or down at least 90% on threat of bankruptcy.
Freddie relies on orginations, which are pretty much dried up at this point. We've already seen subprime go away in early 2007, and after August 2007 jumbos dried up. The next leg to take a fall is standard loans (< $417k), and we can look at the AAA-rated ABX indices to see that the credit crises is expanding to the highest end of credit. ABX indices are trading at 65 to 90 cents on the dollar, depending on vintage year. If you look at Fannie and Freddie balance sheets, the risk is enormous. They both have book values less than 10% of debt, in Freddie's case it's more like 3%. This is ENORMOUS leverage. If Freddie's loans are really worth only 97% of what they say they are, Freddie is bankrupt. I think losses are going to be more like 10% on prime loans, as evidenced by the greater than 10% damage to housing prices in emerging states like FL and CA.
The threat is that the gov't will try to use Fannie and Freddie to bail out the entire mortgage industry. However, this will only lead to destruction of book value for both. I give Countrywide a MUCH better chance of long term survival vs. Fannie and Freddie-- who've both been dummified by anti-competitive legal environment favoring the two gov't subsidized entities. When gov't competes with private industry, the result is usually disasterous for the gov't-supported entities.
Fannie and Freddie are likely bankruptcy candidates, but they may survive with gov't help. But if they do, originations are going away no matter what the Feds do, so earnings hits will take the stock down over 90% from highs of $70.
Look to cover Freddie at less than $7 per share.
Look for CFC to emerge as the new leader in mortgages, although they too will be (and already have been) BADLY ripped up by the time the industry bottoms.
$29.06 (01/18/08)
