A leading bank analyst said the shares of Fannie Mae and Freddie Mac are essentially worthless, suggesting that the best option for the mortgage lenders is to recapitalize them as cooperatives owned by the banks that benefit from their services in the secondary market.

An analyst team at Keefe, Bruyette & Woods (KBW) headed by Bose George cut its price targets on both stocks to zero from $1, MarketWatch reported.

In the recapitalization scenario, both the common and preferred equity of the government-sponsored enterprises “should be worthless,” the KBW analysts said.

Since the federal government put the two agencies into conservatorship, it has poured $98 billion of capital into Fannie and Freddie.

MarketWatch said that the KBW analysts found the various scenarios for what to do with the GSEs, including a report from the Government Accountability Office, failed to address the “most crucial issue” regarding the agencies: how to recapitalize them.

“In our view, the only viable option to limit taxpayer expense and recapitalize Fannie Mae and Freddie Mac is to set up a Bad Fannie and Bad Freddie with the existing portfolios, and a new Fannie Mae and Freddie Mac as cooperatives of bank mortgage lenders, along the lines of the other GSEs — the Federal Home Loan Banks,” the analysts said.

Putting the existing portfolios into receivership in a bad bank would enable the government to limit its losses and define its role in supporting the mortgage industry, as well as create an exit strategy, KBW said.

The GSE ownership structure should be shifted over time to a cooperative of banks similar to the Federal Home Loan Bank system, they said.

Under this approach, the banks that originate an agency conforming loan would be required to retain 5 percent of the loan balance as an equity investment in either Fannie Mae or Freddie Mac. “Thus the new agencies would be recapitalized at a solid 5 percent level of the new expanded balance sheets,” the analysts said.

While the government would initially guarantee the debt of the new agencies, possibly up to five years, the growing capital would allow the government to phase out an explicit guarantee of the debt over time,” analyst team leader George wrote.