Fannie Mae to sell $7 bln stock, slashes dividend

By Al Yoon and Jennifer Ablan

NEW YORK (Reuters) - Fannie Mae (FNM.N) said on Tuesday it will sell $7 billion of preferred stock and slash its dividend 30 percent to shore up its capital base through 2008 as the U.S. housing slump worsens.

Fannie Mae (FNM.N), the No. 1 U.S. residential mortgage finance company, also warned that soaring credit-related expenses will hurt its fourth-quarter earnings, while further declines in home prices will likely dent 2008 results.

The preferred stock sale this month would follow the November issuance of a record $6 billion in preferred shares from Freddie Mac, the other housing-related government-sponsored enterprise (GSE), to prepare for credit losses and maintain its ability to purchase and guarantee mortgages. Fannie Mae sold a $500 million preferred issue on November 16.

"Fannie Mae has a responsibility to serve the mortgage market in good times and in times like these," Daniel Mudd, Fannie Mae's chief executive officer, said in a statement. "The steps we are taking today are designed to enable us to meet that responsibility."

Fannie Mae would take advantage of improved conditions for financial institutions seeking access to capital, Fannie Mae Treasurer David Benson said in the statement. Lehman Brothers Holdings Inc. and Merrill Lynch & Co. are already planning road shows starting on Wednesday, a source said.

The Fannie Mae preferred stock is seen yielding between 8.25 percent and 8.625 percent, according to investors looking at the deal. The Freddie Mac yield was fixed for five years at 8.375 percent.

After the announcement, shares of Fannie dropped 2.4 percent to $34.33.

Fannie Mae and rival Freddie Mac, chartered by Congress to promote homeownership, have increased their role in the housing market this year as investors rocked by defaults in risky subprime mortgages pulled their support from ratings-based mortgage bond programs. But they must balance that growth with constraints of their federal regulator, which has required extra capital since the companies committed some $11 billion in accounting errors earlier this decade.

"In this environment, both Fannie Mae and Freddie Mac are apt to need more capital to run their businesses than has historically been the case," analysts at UBS Securities said in a recent research note.

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac shocked investors with third-quarter losses of $1.5 billion and $2 billion, respectively. Analysts spotting larger concentration of risky loans at Freddie Mac have said Fannie Mae appeared to be in a better position going forward.

Fannie Mae said it will cut its quarterly common stock dividend beginning in the first quarter of 2008, to 35 cents per share from 50 cents.

"I am a little surprised Fannie would bother to cut their dividend because they were more foresightful than most players and had been very careful to make sure they had sufficient capital in anticipation of some problems in the mortgage arena, said Charles Lieberman, chief investment officer of Advisors Capital Management, in Paramus, New Jersey.

U.S. home prices dropped the most in a quarter century in the three months to end-September on an annualized basis as rising inventories of homes for sale, restrictive lending standards and the lingering credit crunch yanked support from the market, a Freddie Mac index showed on Tuesday,

Investors late last month were eager to provide the capital to Freddie Mac. The company garnered about $30 billion in orders for its $6 billion issue, allowing it to lower yields to investors during the marketing and again just before the formal pricing. The connection of the GSEs to the government likely helped draw such demand even though their securities are not backed by taxpayers.

Fannie Mae's $500 million preferred offering last month priced with a 7.625 percent dividend.

(Editing by Leslie Adler)