A robust housing market has helped Fannie Mae and Freddie Mac outperform the S&P 500 and other mortgage finance stocks since late spring.

While the stock market has tumbled from its high point in mid-July, crushing financial services companies, Fannie Mae and Freddie Mac have been stayed afloat as "defensive" stocks-those that enable investors to weather a downturn in markets. And current conditions-a flat yield curve and the start of another refinance boom-are not scaring analysts, despite increased prepayments and potential for an economic slowdown.

"Because of their disciplined risk management processes, they've already shown they can handle one of the most dangerous situations imaginable, which is a refinance boom into a flat yield curve with only modest margin pressure," said Kenneth A. Posner, vice president at Morgan Stanley. "They're well prepared to handle a second refinance boom going forward without a risk to earnings."

Neither stock is immune to investors' flight from the stock market. Fannie closed at $57.75, down 4.35% for the day, and 13.8% from July 17, when the S&P 500 peaked. Freddie Mac's stock closed at $42.3125, down 4.65% for the day, and 16.7% from the market peak.

Fannie and Freddie's shares have done better than the overall market and their peers. In the same period, the S&P 500 has fallen 17.4%, and the American Banker thrift index is off 27.8%.

Mr. Posner's estimates Fannie Mae will report earnings of 81 cents a share for the third quarter. Annualized portfolio growth could reach the mid-20% range, he said. Fannie's balance sheet portfolio may also reach $370 billion by the end of the third quarter, he said. Fannie is growing "surprisingly rapidly" for the third quarter, said Mr. Posner, whose long- term outlook for the company is for 14% annualized growth.

Mr. Posner said he expects Freddie Mac to report earnings of 57 cents a share and portfolio growth of close to $210 billion for the third quarter, representing a 26% annualized growth rate. This contrasts with his long- term outlook of 16% annualized growth, he added.

Mr. Posner said Fannie and Freddie are "well insulated from credit losses in all but the most severe economic downturn scenarios."

The two companies' risk management techniques, credit exposure, and use of technology have contributed to the rise in their retained portfolio growth, Mr. Posner said.

The same arguments also apply to Countrywide Credit Industries Inc. and Dime Bancorp, Mr. Posner said. But most thrifts have not had the same quality risk management in place.

The agencies have been able to manage their risk by using issuance of callable debt, Mr. Poser said. This has helped Fannie and Freddie to hedge the prepayment risk of mortgages. "They're not just taking naive interest rate bets," he said.

Credit exposure is also good, because Fannie and Freddie's loans require a 20% down payment or private mortgage insurance, Mr. Posner said.

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