Fannie's capital to remain under pressure: FBR

(Reuters) - Fannie Mae's (FNM.N) credit losses will exceed the company's expectations, continuing to put pressure on its capital levels and earnings, an analyst at Friedman Billings Ramsey said.

Shares of the Washington-based company fell as much as 10 percent to $8.15 Monday on the New York Stock Exchange.

The largest U.S. home-funding company would need to raise additional capital of $5 billion to $10 billion to strengthen its balance sheet for future credit losses and continue to supply liquidity to the mortgage market, analyst Paul Miller, who rates the stock at "underperform," said in a note.

"We believe the GSEs (government-sponsored enterprises) will continue to have trouble with both credit losses and capital levels, and we recommend that investors remain cautious on the names over the next few quarters," he said.

Credit losses will not peak until late 2009/early 2010, and this should result in elevated provisioning over the next three to four quarters, possibly pressuring the company's capital cushion, Miller wrote.

With credit-related expenses of $7 billion to $8 billion over the next two quarters, Fannie Mae's capital cushion, which currently stands at $9.4 billion, could be materially cut to the point that it may have to raise additional capital, he said.

Credit Suisse analyst Moshe Orenbuch said cumulative lifetime losses on Fannie Mae's entire guarantee book, which includes its exposure to non-traditional loans, would exceed $40 billion.

Orenbuch said he raised his estimates for credit provisioning and real estate-owned expenses for Fannie Mae through the rest of 2008 to be another $9 billion, up from his prior estimate of $5 billion.

Orenbuch rates the stock at "underperform."

NO THREAT YET?

Analyst Howard Shapiro of Fox-Pitt Kelton said Fannie Mae would need to incur more than $54 billion in losses over next 6 quarters for its minimum capital levels to be endangered, but such a scenario was highly unlikely.

Shapiro, who has an "in line" rating on Fannie Mae stock, also said further substantial capital raise was highly unlikely at the firm.

Fannie Mae on Friday posted its fourth straight quarterly loss as home-loan defaults increased, and said it "may, from time to time, raise capital opportunistically" after raising more than $7 billion in added capital in the second quarter.

Although the company's revenue rose in the second quarter, and should continue to be strong over the next few quarters, it will not be enough to offset future credit costs, analyst Miller said.

"We believe house prices continue to decline, and loss severity is increasing in our opinion," Miller said.

The company will make it through the current housing crisis, but the shareholders are exposed to losses as rising credit cost will continue to pressure valuation of the stock, Miller added.

(Reporting by Mary Meyase and Ramya Dilip in Bangalore; Editing by Vinu Pilakkott and Gopakumar Warrier)