As Vivek Junega sees it, the thrift industry is undergoing a historic transformation.
There has been "a sea change in management, their thinking, and the way they run their business," said the J.P. Morgan & Co. thrift analyst.
The companies, he says, are "reducing their dependency on mortgages while broadening their product profile and improving their profitability."
Mr. Junega knows whereof he speaks. He took first place in American Banker's Wall Street Sharpshooters ranking of analysts who cover the thrift industry and Fannie Mae and Freddie Mac. Out of five analysts, he made the most accurate estimates of earnings, according to data compiled by First Call/Thomson Financial.
As thrifts reinvent themselves, Mr. Junega says, the biggest winners are larger institutions that have broadened their product lines and become more "bank-like." Classic examples are Charter One Financial and Washington Mutual Inc., which are focused on building their retail banking businesses.
Other thrifts are pursuing niche businesses.
Mr. Junega cited Dime Bancorp, which has made itself into a national mortgage company, and People's Bank, which has focused on expanding its credit card operation.
As such strategies unfold, "you could end up with some savings and loans that are neither able to make the transformation or attractive enough for anyone to want to acquire," Mr. Junega said. "They would just muddle along."
Mr. Junega has been at Morgan for 10 years, spending the past three years on his current group of companies. He is known for doing his homework thoroughly.
"What stands out about Vivek is that no matter what hour of the day or night, you can expect a call from him asking a detailed question," said Ellen Goldberg, vice president for investor relations at Fannie Mae. "He is one of the smartest and most thorough of the analysts that follow our stock."
The stocks of thrifts have not reflected the benefits of the industry's transformation, Mr. Junega said. "The stocks have been lagging because of concerns about sluggish originations of adjustable-rate mortgages and, consequently, slow asset growth.
"The penalties are unfair," Mr. Junega said. "Many of the thrifts have been able to sustain good, double-digit earnings per share growth."
Mr. Junega is a clear fan of Fannie Mae and Freddie Mac, calling them both "very well managed companies."
He describes the companies as "titans of the mortgage business," noting that they own or have securitized 40% of the $4 trillion ofz mortgage loans outstanding.
Both Fannie and Freddie "have rapidly grown their mortgage investment businesses and managed extremely well through the very volatile environment we saw last year," Mr. Junega said.
The companies "maintained very strong growth rates as a result of an improvement in credit and very solid business volumes," Mr. Junega said.
Fannie and Freddie face constant challenges from interest rate risk, political risk, and credit risk, he said.
To offset interest rate risk, the companies have developed new offerings like large bond issues to help reduce funding costs by bringing in new investors.
Also, both companies have been creative in using derivatives to manage their exposures to rate and credit risks, Mr. Junega said.
Fannie and Freddie are not afraid to be controversial. Both recently reduced mortgage insurance requirements for loans, a move that "has insurers upset because it cuts into their revenues but benefits borrowers because of lower mortgage insurance costs," Mr. Junega said.