Keefe cuts Fannie, Freddie earnings estimates by 10%

Keefe Bruyette reduced the firm’s earnings estimates for both Fannie Mae (FNMA) and Freddie Mac (FMCC) by 10%. Keefe expects $26B of combined earnings pro forma, including the cost of the $2.4B of preferred dividend expense, which is currently not being paid. The companies earn a roughly 65 basis point incremental guarantee fee, but pay10 points of that to Treasury as part of a fee that was initially put in place under the Temporary Payroll Tax Cut Continuation Act, the analyst tells investors in a research note. The firm sees a “robust” earnings outlook for both Fannie and Freddie but downside to the common shares unless the privatization succeeds and the government’s senior preferred shares and the liquidation preference are forgiven. It has Underperform ratings on both stocks with a $4 target for Fannie and $4.50 target for Freddie.