Federal Home Loan Mortgage (FMCC) Could Be 73% Below Fair Value On Higher Mortgage Rates

Freddie Mac (FMCC) moved back into focus after its latest Primary Mortgage Market Survey showed the average 30-year fixed-rate mortgage at 7.28%, signaling shifting conditions for housing affordability and credit demand.

For Federal Home Loan Mortgage, that mortgage rate update lands against a tough price backdrop, with the 30 day share price return down 27.41% and the year to date share price return down 62.13%. At the same time, the 3 year total shareholder return is very large at more than 7x even after a 68.36% decline over the past year, hinting that sentiment has swung sharply as investors reassess both housing risk and long term optionality.

Spot 28 high quality undervalued stocks that, like Federal Home Loan Mortgage, could be sensitive to mortgage rate moves and broader shifts in credit conditions.

After such a steep pullback in Federal Home Loan Mortgage, with a very large 3 year gain still on the board and fresh mortgage rate pressure in play, does the current setup still offer a worthwhile risk trade off for new buyers?

Most Popular Narrative: 73% Undervalued

On the numbers, the most followed narrative sees Federal Home Loan Mortgage worth $14.70 a share, compared with a last close of $3.92, which puts a big gap between sentiment in the market and that fair value estimate.

The single family mortgage portfolio of US$3.7t and Freddie Mac's 51% GSE market share position the company to benefit if refinancing activity stays supported by periods of comparatively lower rates, which can support net interest income and fee driven revenues.

The shift in multifamily toward fully guaranteed securitizations, with nearly all of the US$24b securitized in the quarter carrying guarantees and a higher average guarantee fee rate of 58 basis points, points to a business mix that can support net interest income and earnings quality.

See why 2 investors see Federal Home Loan Mortgage as 73% undervalued.

That fair value of $14.70 comes from analysts who apply a 12.46% discount rate to their long term forecasts and then compare it with the current share price. They are incorporating slow top line expansion of about 1% a year, a move from a small loss of $12 million today toward break even, and an earnings profile that they expect to improve over time.

Those same forecasts also imply Federal Home Loan Mortgage would need to support a P/E multiple that is far above the current 17.1x level for the wider US diversified financials peer group in order to line up perfectly with the narrative model. That gap makes the story heavily dependent on investors accepting a richer valuation for effectively flat forecast profits in the outer years.

For anyone weighing that 73.3% discount to the $14.70 narrative fair value against the recent share price slide and the current loss making status, the key question is how much confidence to place in those refinancing, credit quality and fee income drivers holding up over time.

Result: Fair Value of $14.70 (UNDERVALUED)

Still, the Freddie Mac narrative can crack if refinance volumes stay weak in a higher rate setting or if housing policy changes disrupt mission-driven affordable lending.

Find out about the key risks to this Federal Home Loan Mortgage narrative.

Next Steps

Mixed messages around Federal Home Loan Mortgage can be confusing. Move quickly to test the numbers, weigh the trade offs, and check the 3 key rewards and 1 important warning sign.

Looking for more Federal Home Loan Mortgage investment ideas?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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