Freddie, Fannie bail-out concerns premature: Merrill

(Reuters) - Merrill Lynch said it was premature to consider a recapitalization sponsored by the U.S Treasury for Freddie Mac FRE.N and Fannie Mae FNM.N, the two biggest U.S. mortgage finance giants, as capital depletion would not likely occur for several quarters.

"Shareholder interest would arguably be better served if policy makers delay any meaningful discussion of altering the current status quo for Freddie Mac and Fannie Mae, as the shares would benefit from any relief rally," analyst Kenneth Bruce said in a research note.

Bruce said it seemed likely that policy makers will attempt to placate the market by backing debt and mortgage-backed securities of Freddie and Fannie until it can garner political support for a longer-term solution.

However, he added that it will become increasingly difficult for policy makers to ignore the situation, as risks of further contraction in the mortgage market are as unpalatable as a high-profile bail-out.

The brokerage said uncertainty will continue to affect share prices until there is better clarity on the fundamental, public policy and political issues framing decision-makers views.

Bruce lowered his price target on the stock of Freddie Mac to $3 from $5.75 and that of Fannie Mae to $5 from $9, citing poor visibility into the future of credit losses and the uncertainty about the possible public policy actions that could harm shareholders.

The analyst has an "underperform" rating on both the stocks.

Shares of Fannie Mae were up 29 cents at $5.91 and the stock of Freddie Mac was up 39 cents at $4.36 in morning trade on the New York Stock Exchange.

(Reporting by Supantha Mukherjee in Bangalore; Editing by Amitha Rajan)