UPDATE 1-M. Stanley cuts US mortgage, specialty finance sector
(Changes source and adds details)
Jan 18 (Reuters) - Morgan Stanley cut its view on the U.S. mortgage and specialty finance sector to "cautious" from "in line," saying recent economic and housing market data pointed to a "bear case" for mortgage credit.
The investment bank said its bear case was a scenario where rising unemployment, falling home prices, and normalization of bankruptcy filings led to unprecedented loss rates for mortgages (both prime and subprime) and peak-of-cycle losses for credit cards and other forms of consumer credit.
Analyst Kenneth Posner downgraded Fannie Mae (FNM.N) to "underweight" from "equal-weight" and cut his price target on the the nation's largest source of mortgage financing to $25 from $39. He also cut his target on Freddie Mac (FRE.N) to $30 from $47, while maintaining his "equal-weight" rating on the stock.
Both Fannie Mae and Freddie Mac stocks will see a sell off if the two firms widen their loss view, as investors would be concerned about the impact of losses on earnings and on regulatory capital, Posner said.
The analyst, however, said he saw value in the credit guarantee business as the government sponsored enterprises -- Fannie Mae, in particular -- enjoy pricing power.
"With the companies enjoying government-guaranteed liquidity, and with the risk of regulatory capital shortfalls receding, investors will at some point start to focus on growth and margins," Posner added.
Fannie Mae shares fell more than 2 percent to $34.18, while Freddie Mac shares were up 5 cents at $29.13 in early morning trade on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore; Editing by Amitha Rajan)
