Merrill warns on Fannie, Freddie stock

Shares of Fannie Mae and Freddie Mac fell Friday after a Merrill Lynch & Co. analyst said the housing and debt market slumps would stifle earnings at the mortgage-finance companies through 2011.

Fannie Mae, the largest source of money for U.S. home loans, declined 27 cents to $28.72 after the Merrill analyst said investors should sell their shares in both companies. Freddie Mac, the second-largest provider, fell $1.14 to $26.61.

The companies, which own or guarantee about 45% of the $11.5 trillion in U.S. residential mortgages outstanding, may need to raise more money to cope with loan defaults, the analysts wrote in a report.

Fannie Mae and Freddie Mac reported $3.4 billion in combined third-quarter losses and are expected next week to report similar results for the fourth quarter.

“We do not think the stocks fully reflect the severity or duration of the financial headwinds facing the companies,” Merrill analyst Kenneth Bruce in San Francisco wrote in a note to clients. There is “more pain than gain.”

Fannie Mae spokeswoman Janis Smith and Freddie Mac spokeswoman Sharon McHale declined to comment. Freddie Mac is scheduled to report earnings Thursday, and Fannie Mae by Friday.

The companies’ shares may fall below their 2007 lows of $28.25 for Fannie Mae and $24.50 for Freddie Mac, Bruce wrote. Fannie Mae has dropped 52% in the last year, and Freddie Mac is down 60%. Earnings under generally accepted accounting principles could “languish for years,” he said.