Fannie Mae draws a zero-dollar price target due to dilution

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Fannie Mae could be worthless to public shareholders, according to its newest analyst.

Federal National Mortgage Association drew an underperform rating and a price target of zero dollars from Wedbush analyst Henry Coffey, who started coverage Tuesday.

In May the Federal Housing Finance Agency proposed that Fannie Mae and fellow mortgage giant Freddie Mac be required to hold hundreds of billions of dollars in capital to guard against losses.

Despite the "tremendous underlying value" in the company, any recapitalization of Fannie Mae is likely to result in substantial dilution to public shareholders, Coffey wrote in a report. He is one of two sell ratings among six analysts tracked by Bloomberg. The shares closed Tuesday at $2.09.

"Our estimates suggest that in the process of recapitalizing Fannie Mae, there will be little or no value left over for current public shareholders, and that any residual value accruing to them will be greatly diluted by Treasury's warrant," Coffey said.

That warrant covers roughly 80% of the shares outstanding when exercised and expires in September 2028.

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