With the first bit of distance from which to view the U.S. government’s bailout of government-sponsored entities (GSEs) Fannie Mae (FNM) and Freddie Mac (FRE), we wanted to find out from Zacks senior finance industry analyst Neena Mishrahow much of a game-changer this is for the housing market, Wall Street overall and the U.S. economy as a whole.
What sort of immediate impact do you expect among financial companies in your coverage now that Fannie and Freddie will officially be bailed out?
The move was overall positive for the housing market and the wider economy, as it removed the uncertainty related to the government support of the GSEs, and is also likely to help bring mortgage rates down. Yet we do not expect it to lead to a recovery in the housing markets. The housing situation in the country continues to be quite grim as there is still a large supply of unsold homes in the market and an increasing number of foreclosures.
While the bailout will bring down the mortgage rates, we do not anticipate any significant increase in the buying activity in the housing markets, in view of high inflation, rising unemployment (now above 6%) and increased job losses. Further, since the banks continue to struggle with large amounts of problem assets on their balance sheets, their lending abilities will be limited and tighter lending and underwriting norms will also limit the lending activity. Thus, we also do not see housing prices stabilizing very soon.
Does this mark the beginning of a new direction in the U.S. finance business, mortgages, etc., or are there other big questions still out there?
We maintain our negative outlook on the banks and mortgage insurers and neutral outlook on the P&C and Health insurers. While we acknowledge that the GSE bailout was overall supportive for the markets, we do not see the housing markets bottoming out at present.
Many of the banks under our coverage will report higher losses, particularly related to the mortgage and residential construction portfolios, in the coming quarters. Same is the case with the mortgage insurers who will report increased losses in the U.S. mortgage operations. As a result, they will need to raise additional capital and/or eliminate/cut their dividends. We also anticipate losses related to some banks’ and insurers’ exposure to preferred stocks of the GSEs, which will likely need to be marked down.
Do you see any sub-sectors within your coverage trading at attractive valuations these days?
We suspect that the credit costs will remain elevated during the second half of 2008 and at least a part of 2009 and will continue to impact the earnings. Among the banks, we favor those which have low exposure to housing and residential construction loans and/or derive a significant portion of their earnings from fee based sources. Among the insurers also, we continue to prefer those which have superior capital levels and lower exposure to mortgage related securities in their portfolio, compared with their peers.
Are there Sells you would care to point out for investors to stay away from?
We would advise the investors to stay away from banks like National City Corp. (NCC), Wilmington Trust (WL), Zions Bancorp (ZION), Keycorp (KEY) and Comerica (CMA), and mortgage insurer PMI Group (PMI).
Neena Mishra is a senior analyst covering financial institutions and insurers for Zacks Equity Research.
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