UPDATE 4-Fannie Mae posts loss, to cut payout, raise capital

(Updates with closing stock prices)

By Lynn Adler

NEW YORK, May 6 (Reuters) - Fannie Mae (FNM.N) on Tuesday posted a massive quarterly loss, its third straight, on the protracted U.S. housing market slump, prompting it to slash its dividend and set plans to raise $6 billion of fresh funds.

Still, executives of the largest U.S. provider of home financing were cautiously optimistic that the worst of the credit turmoil that erupted from the housing crisis may have passed. Their comments triggered an 8.9 percent rise in Fannie Mae shares and supported a wider advance in U.S. stocks.

"We're taking a long-term view, not an hour or a week or a month, and we think that in a couple of years this stock will be materially higher because there will be a recovery in the housing industry," said Marshall Front, chairman of Front Barnett Associates in Chicago, which holds Fannie Mae shares.

The stock had initially fallen on the deeper-than-expected quarterly loss and credit-related expenses. Fannie Mae posted a net loss, after payment of preferred dividends, of $2.51 billion, or $2.57 per share, for the first quarter, according to a regulatory filing. Before preferred dividends, it posted a loss of $2.19 billion.

The loss was greater than even the most pessimistic forecast and came on the heels of a record $3.6 billion loss in the fourth quarter of 2007. In last year's first quarter, just before the slump in the housing market torpedoed mortgage and credit markets, Fannie posted a profit, after preferred dividend payments, of $826 million, or 85 cents per share.

Fannie's latest quarterly loss and its need to raise capital reflect the plight of financial services companies worldwide, which have written off more than $330 billion in soured mortgage securities and raised more than $200 billion to shore up depleted balance sheets.

Market sentiment turned when company officials in a conference call stressed that the quality of the mortgages it is buying has improved and its fee structure now better reflects market risk.

They also said the housing market is now in the "belly" of one of the worst cycles since the Great Depression, suggesting the nadir may be in sight.

"Right now, we are in the belly of this cycle," Daniel Mudd, Fannie Mae's chief executive, said in a conference call. "The initial period of (disruption) in the marketplace appears to be dissipating. The capital markets are recovering balance."

Fannie Mae and its sister company Freddie Mac provide capital to U.S. mortgage markets by buying loans originated by banks and other lenders.

After Fannie Mae announced its capital-raising plans, its regulator, the Office of Federal Housing Enterprise Oversight, said it intended to reduce the amount of surplus capital the company needed to hold, which further boosted optimism about the company's ability to expand its holdings of relatively cheap mortgage assets and restore profitability.

Shares of Fannie Mae closed up $2.52 at $30.81 on the New York Stock Exchange, after trading as low as $26.25 earlier.

FURTHER DECLINES LIKELY

Still, Fannie Mae warned that U.S. house prices, by some measures already 15 percent below their peak in mid-2006, likely will drop as much as another 9 percent this year and related credit losses will keep increasing into 2009.

Home price declines and rising foreclosures that started in the risky subprime mortgage market have spread to higher-quality loans that make up the bulk of business at Fannie Mae and Freddie Mac (FRE.N).

"During the first quarter we saw heightened volatility in the secondary mortgage market, credit spreads that widened out to 22-year highs and home prices that fell faster than expected," Mudd said.

The company has "stanched the bleeding" from some of its volatile assets with new hedge accounting, which should help reduce losses, said Robert Levin, Fannie Mae's chief business officer.

Freddie Mac, too, is expected to post a big loss when it reports its first-quarter results next week. Its shares bounced as the momentum changed in Fannie Mae shares, ending 7 percent higher at $27.33 on the New York Stock Exchange.

NEW CAPITAL, SMALLER DIVIDEND

In one measure to preserve cash, Fannie Mae said it will slash its common stock dividend to 25 cents per share from 35 cents, starting with its third-quarter payout, freeing up $390 million a year.

The company also plans to raise $6 billion in new capital through common and preferred stock offerings, which it started on Tuesday, it said.

Fannie Mae needs to retain capital and raise more funds to fight its way through the housing meltdown.

Regulator OFHEO on Tuesday said it planned to ease limits on the amount of surplus capital Fannie must maintain and lifted a consent order that had restricted some of the company's activities after an accounting scandal.

"They are going to have more capital to go out in the marketplace and take advantage of bargains," said Charles Lieberman, chief investment officer of Advisors Capital Management in Paramus, New Jersey, which owns Fannie Mae shares.

Fannie Mae executives confirmed that the new capital will enable it to keep expanding its mortgage purchases, seen critical by lawmakers who are turning to the company to help stabilize the U.S. housing market.

Through February, home prices fell nearly 15 percent from their July 2006 peak, based on the Standard & Poor's/Case Shiller index of 20 metropolitan areas. In February alone, the latest month for which data is available, prices slid 2.6 percent from January and 12.7 percent from a year earlier.

Foreclosure filings surged 23 percent in the first quarter, and were more than double a year earlier, RealtyTrac said.

For all the red ink, Fannie's results showed some improvement from the previous quarter. The company's mortgage market share, total book of business and revenues from its guarantee and investment activities grew in the quarter.

The housing and credit market crisis has hit financial shares hard, and Fannie Mae suffered more than most. Its stock is off more than 50 percent in the last year -- more than twice the S&P 500 financial index's .GSPF drop in the same period. (Editing by Leslie Adler)