Fannie Cuts Dividend, Offers $7 Billion in Preferreds (Update2)

Dec. 4 -- Fannie Mae, the largest source of money for U.S. home loans, cut its dividend 30 percent and said it will sell $7 billion of preferred stock to bolster capital as the housing crisis deepens.

The quarterly payout will drop to 35 cents a share from 50 cents starting in the first quarter, Washington-based Fannie Mae said in a statement today. The government-chartered company plans to issue the preferred stock later this month.

The worst housing slump in at least two decades will hurt fourth-quarter earnings ``in a material way'' and continue to weigh on 2008 results, Fannie Mae said. The decision to shore up capital follows a similar move last week by McLean, Virginia-based Freddie Mac. Fannie Mae said last month it had a capital cushion of $2.3 billion after reporting a quarterly loss of $1.4 billion.

``There may be more losses,'' said David Dreman, who oversees $22 billion including Fannie Mae shares as chairman of Jersey City, New Jersey-based Dreman Value Management LLC. ``Raising more capital will allow them to go out and start growing again'' by leveraging their government-chartered status and continuing to expand their business of guaranteeing mortgage bonds.

Fannie Mae dropped $1.28, or 3.6 percent, to $33.90 in late New York Stock Exchange trading. Credit-default swaps tied to the company's senior unsecured bonds rose 2 basis points to 42 basis points, according to broker Phoenix Partners Group in New York. An increase in the contracts, used to speculate on Fannie Mae's creditworthiness, suggests deterioration in investor confidence.

The preferred stock sale will be managed by Lehman Brothers Holdings Inc. and Merrill Lynch & Co., the company said.

Loan Losses

Fannie Mae, which owns or guarantees about one in five U.S. home loans, reported the record third-quarter net loss because of the effect of rising mortgage defaults and foreclosures.

Fannie Mae's loan loss ratio could at least double to 8 to 10 basis points next year, Chief Executive office Daniel Mudd said on a conference call with analysts on Nov. 9. The ratio was 4 basis points for the nine months ended Sept. 30, and 1.8 basis points in the year-ago period, according to a company filing that day with the Securities and Exchange Commission.

Freddie Mac sold $6 billion in preferred stock last week and cut its dividend in half after losses tied to bad loans reduced the company's core capital cushion by two-thirds last quarter, leaving it with just $600 million more than the federally required reserve level.

Fannie Mae is ``affected by the same developments in the market that Freddie Mac is,'' Howard Shapiro, an analyst at Fox- Pitt Kelton Cochran Caronia Waller LLC, said in an interview. ``I would view this as a little more opportunistic than Freddie Mac's move, but credit issues are issues for both of them.''

Raising Capital

Fannie Mae last month raised $500 million in preferred stock.

The actions today will help the company ``maintain a solid capital position through 2008,'' the company statement said. It will ``strengthen Fannie Mae's ability to manage the effects of ongoing volatility in the mortgage credit markets, continue to grow its securitization activities and pursue attractive investment opportunities,'' Fannie Mae said.

Congress created Fannie Mae and Freddie Mac to increase mortgage financing by buying loans from lenders. The companies profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

The slumping housing market has sapped funds from mortgage lenders, banks and securities firms, some of which are turning to outside sources for cash. Citigroup Inc., the biggest U.S. bank by assets, said last week it would receive a $7.5 billion cash infusion from the emirate of Abu Dhabi to replenish capital after record mortgage losses wiped out almost half its market value.

Countrywide Financial Corp., the biggest U.S. mortgage lender, sold $2 billion of preferred stock to Bank of America Corp. in August to bolster its finances amid the housing slump.