Fannie Mae Cutting Dividend 30 Percent, Selling $7 Billion in Preferred Stock to Raise Capital

WASHINGTON (AP) -- Mortgage finance giant Fannie Mae on Tuesday announced it was cutting its dividend 30 percent and selling $7 billion in special stock to raise additional capital.

The government-sponsored company said it was slicing its dividend to 35 cents a share, starting in the first quarter of next year, and issuing $7 billion in preferred stock this month to cushion against losses in lower-quality mortgages.

Fannie Mae, which finances or guarantees one of every five home loans in the United States, last month reported a third-quarter loss of $1.4 billion, while forecasting housing market woes through next year because of mounting home loan delinquencies.

The stock sale "will provide the company with additional capital to conservatively manage increased risk in the housing and credit markets, help meet its mission of providing affordability, liquidity and stability, and free up capital to pursue emerging growth opportunities," Fannie Mae said in a statement.

The action follows similar moves recently by Freddie Mac, its smaller government-sponsored rival in the $11 trillion home-mortgage market, which posted a $2 billion loss in the third quarter.

The company said Tuesday it expects the continuing turmoil in the housing and credit markets and anticipated further declines in home prices to "negatively affect" its financial condition and results next year.

Fannie Mae shares, already down $1.07 or nearly 3 percent Tuesday, fell another 81 cents to $34.37 in extended trading after the company's announcement.

"Fannie Mae has a responsibility to serve the mortgage market in good times and in times like these," the company's president and CEO, Daniel Mudd, said in a statement. "The steps ... are designed to enable us to meet that responsibility with a comprehensive, conservative plan to serve the market and manage our capital. The market needs us to be there -- and we believe this plan will help us do that."

The entire $7 billion in preferred stock to be sold will not be convertible into common stock, Washington-based Fannie Mae said. Converting stock into common stock dilutes the value of outstanding shares and could further depress stock prices.

Typically, preferred stock pays a higher dividend than common stock and carries a stronger claim on the assets of a company if it goes into bankruptcy.

Robust investor demand emerged last week for Freddie Mac's $6 billion offering of preferred stock, also nonconvertible, at $25 a share. The offering, said by the company to be five times oversubscribed, has been closely watched by investors gauging the extent of the housing market's turbulence.

Fannie Mae said improved capital market conditions prompted the stock sale this month, citing "large transactions with relatively attractive terms." It did not name those transactions.

Lenders, investors and consumers likely will keep a watchful eye on the financial health of Fannie Mae and Freddie Mac, which both posted staggering third-quarter losses as they were returning to normalcy following multibillion-dollar accounting scandals several years ago.

By buying up mortgages they make and then bundling them as securities for sale to investors, the two companies traditionally have been a major source of funding for banks and other mortgage lenders. Industry experts say a reduced role by either could ripple across the housing market.