Lehman trims estimates on Fannie May (FNM) and Freddie Mac (FRE):
The housing market continues to deteriorate at an accelerating pace, with national home prices already down 4% from the peak (based on the OFHEO index) and expected to fall even farther than we previously believed to 20% from the peak, which is causing us to increase our estimates for credit costs.
Lehman thinks that rising interest rates could help ameliorate some of these problems as both firms benefit from increased valuations of non-cash derivatives. But in the near term, credit costs will continue to rise, which will force higher losses.
FRE 2Q EPS moves from -$0.40 to -$0.55. Target price stays at $45 and rating remains 1-Overweight.
FNM 2Q EPS falls from -$0.68 to -$1.20. Target price remains at $46 and rating stays at 1-Overweight.
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