Falling credit costs will power earnings growth at Fannie Mae through 2000, according to analysts who attended the agency's presentation last week to the New York Society of Security Analysts.
After last Tuesday's meeting, analyst Thomas O'Donnell of Smith Barney & Co., New York, estimated that Fannie's credit losses would be $420 million on $1 trillion of at-risk business in 2000, flat in absolute terms with this year's expected losses.
But whereas credit losses are expected to equal 6 basis points of Fannie's at-risk business of roughly $700 billion this year, losses in 2000 would equal only 4 basis points, Mr. O'Donnell estimated. Already, Fannie's credit costs are the lowest in the mortgage business - about one-half or one-third those at the Federal Home Loan Mortgage Corp., or Freddie Mac, and at major mortgage insurers.
Lower credit costs would mean that Fannie, formally the Federal National Mortgage Association, could add fewer loans to its portfolio and hold less capital against them to meet its target of double-digit earnings growth during the next five years, said Jonathan Gray of Sanford C. Bernstein & Co.
Capital is a hot issue these days; the Office of Federal Housing Enterprise Oversight has said it expects Fannie Mae and Freddie Mac to have to hold more capital once risk-based capital standards are adopted.
Mr. Gray said Fannie Mae's chairman, James A. Johnson, assured analysts the agency does not believe it will have to add much capital, if any, to meet the standards likely to be proposed next year.
Fannie may also announce additional share buybacks before the regulator proposes capital standards, Mr. Gray said.
Mr. O'Donnell of Smith Barney said that Fannie Mae executives also emphasized the agency was making a strong marketing effort to convince investors that Fannie Mae's stock price is too low in relation to its earnings.
Fannie Mae compared itself to a peer group of high-quality industrial companies, such as General Electric, Pepsi, Philip Morris, AT&T, and IBM, Mr. O'Donnell said. These companies have shown slower earnings growth than Fannie but trade on average at a price equal to 15 times their estimated 1997 earnings per share. Fannie Mae trades at less than 13 times earnings.
On another front, the Federal Housing Finance Board reported Friday that the average home price in September was 10.15% higher than a year before. If the trend holds in October, Fannie Mae's and Freddie Mac's loan ceiling - the size of the largest loan they may buy - could rise from the current $207,000 to $228,000 in 1997.