FBR: Sovereign exposed to Fannie, Freddie woes

To gain insight on the potential impact of a government bailout of Fannie and Freddie on those firms that hold preferred securities, FBR analyst David Rochester considered the banks' equity exposures in the mortgage finance companies versus their tangible equity. Sovereign's ratio of equity exposure to tangible equity was deemed to be 8.9 percent at the end of the second quarter.

Fannie and Freddie hold or guarantee half the U.S. mortgage debt and are considered crucial to the mortgage market's continued operation.

Fears have mounted in recent weeks that the companies would require a government bailout, which would essentially wipe out common shareholders' equity.

Concern also has been growing that a government rescue of Fannie and Freddie could be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred securities.

Meanwhile, Boenning & Scattergood Inc. analyst Matthew Schultheis reiterated a "Market Perform" rating on Sovereign's shares.

"Despite favorable strategic and operational shifts the company has undertaken in the past two years, we believe credit pressures as well as general market conditions affecting both the stock directly and certain balance sheet items can create an opportunity for investors to purchase positions at more attractive entry points," Schultheis wrote in a note to clients.

Sovereign shares added 12 cents to $8.73 in afternoon trading.