Fannie Mae and Freddie Mac have been recording strong profits during the first three quarters of 1999, however, their stocks have plummeted, resulting from rising mortgage rates and increased political risk.

Fannie Mae has posted increased earnings every quarter for the past 12 years, including a third-quarter increase of 94 cents per share. And Freddie Mac is expected to announce earnings of 75 cents per share later this month.

But Fannie Mae and Freddie Mac's stocks have fallen 12% and 19%, respectively. This comes at a time when other financial stocks are soaring: Standard & Poor's Ratings Group's Financial Miscellaneous index is up 11% for the year, while the Bloomberg U.S. Internet Index is up 60%.

A rise in interest rates has led to a perception that homeowners have stopped refinancing mortgages, leaving fewer loans for the companies to buy. This has caused the two companies' stocks to tumble. However, analysts indicate that this downturn in stock value is going to be short-lived.

Salomon Smith Barney analyst Thomas O'Donnell said he expects Fannie Mae shares to increase from 65 7/16 to around 90 within the next 12 months to 18 months. Freddie Mac's shares are expected to increase to 75 from 52 1/16 over the same time period.

Although the two companies stocks are significantly down for the year, the numbers can be misleading. Fannie Mae's stocks have risen 600% and Freddie Mac's have increased 800% this decade. And there is little concern that rising rates will have a devastating impact on Fannie Mae and Freddie Mac's earnings.

Because of this phenomenon, and with the total production of mortgages on a downward trend, Fannie Mae and Freddie Mac have resorted to unconventional methods to ensure investors that they will keep buying loans and expanding business ventures. One example is Fannie Mae's announcement of buying loans from A-minus borrowers who have little or no credit history (MBSL 10/11/99).

Also, with the 2000 elections coming up, political groups such as FMWatch have formed and a new Congress with a perceived different attitude has created political uncertainty. This has kept investors away from purchasing Fannie Mae and Freddie Mac stocks. All are more aware of political risk to the agency's expansion plans that didn't exist a year ago, said one Wall Street analyst who wished to remain anonymous.

Overall, analysts have acknowledged that the refinancing wave is dying out, but the housing market is still strong. However, despite earnings, there is a notion that investors will sell based mostly on perceptions of the market.

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