updated 12/5/2007 8:11:02 AM ET 2007-12-05T13:11:02

Fannie Mae has joined rival mortgage financer Freddie Mac in cutting its dividend and selling billions of dollars worth of special stock to raise capital to cushion against mounting losses from high-risk home loans.

Fannie Mae said Tuesday it is slicing its dividend 30 percent, to 35 cents a share, starting in the first quarter of next year, and issuing $7 billion in preferred stock this month. The action follows similar moves recently by Freddie Mac, Fannie Mae’s smaller government-sponsored competitor in the $11 trillion home-mortgage market.

As the crisis in the housing market deepened, Fannie Mae and Freddie Mac both posted staggering third-quarter losses as they were returning to normalcy following multibillion-dollar accounting scandals several years ago.

By buying up mortgages made by banks and other lenders and then bundling them as securities for sale to investors, the two companies traditionally have been a major source of funding for the home-loan market. Industry experts say a reduced role by either could ripple across the housing market. Policymakers and housing industry leaders have been pushing for an expanded role for the companies in the face of swelling foreclosures and defaults across the country.

Washington-based 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.

On Wednesday, Fannie Mae said it expects credit losses from bad loans to worsen in 2008.

The comment came in a statement on its Web site that was part of a sales pitch to prospective investors in its planned share offering.

Fannie Mae said credit losses in 2008 will be 8 to 10 basis points, up sharply from its forecast of 4 to 6 points in 2007. Fannie said it will tighten underwriting standards and try to mitigate losses by offering more loan workouts to borrowers in trouble.

The special 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 company said 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.

In Wednesday’s posting, Fannie said it expects home prices will fall by 10 percent to 12 percent from their peak before the housing market improves.

“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 Tuesday 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, 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,” which it did not name.

Fannie Mae’s stock offering is being managed by Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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