MDB Capital Group LLC, a Santa Monica, Calif.-based equity research firm, has initiated its coverage of Fannie Mae with a sell recommendation.
Wait a minute - why on earth would anyone recommend selling Fannie Mae? The quasi-governmental agency that buys, repackages and sells home mortgages reported an 18% increase in core business earnings in the second quarter. And it has recorded growth in earnings per share for 28 consecutive quarters.
But Peter Conley, MDB managing director and director of equity research, is convinced Fannie is facing other, more long-term problems that other research firms are overlooking or ignoring. Of primary concern to Mr. Conley is the agency's use of synthetic fuel tax credits to lower its marginal tax rate and appear more financially healthy. The agency has not disclosed that it uses such tax credits, but Mr. Conley said he thinks it does, based on his company's research. And because of the possibility that the IRS may enact stricter guidelines governing the use of those credits, Fannie may not be able to make as much use of them in the future.
Other concerns include negative trends in areas such as pre-tax margin, use of leverage and the ratio of loan reserves to loans. In addition, there is "divergence" between Fannie's future earnings guidance and economic factors suggesting a slowing in the growth rate of new and refinanced residential mortgages because of projected increases in mortgage rates. And today Fannie has less money in reserve to cover defaults than it did in the past, although it has been buying mortgages with greater default risk, Mr. Conley said.
Hence the sell recommendation - the first issued on Fannie Mae in at least seven years, Mr. Conley said. Currently none of the 28 research firms tracking Fannie Mae has issued such a recommendation, he added. "Most people don't view these as any sort of real issues."
In his report, issued July 22, Mr. Conley wrote that Fannie Mae stock, which closed July 31 at $64.04 a share , is really worth about $49 a share.
Janis Smith, spokeswoman for Fannie Mae, did not return calls for comment by press time.
