Fannie Mae to cut payout as posts loss

By Lynn Adler

NEW YORK (Reuters) - Fannie Mae 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 a big rally 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.

Earlier the stock fell on concern over 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 Mae's loss and 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."

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

Shares of Fannie Mae rose nearly 7 percent at $30.11 on the New York Stock Exchange at midday, after sliding to $26.25 in early trading.

FURTHER DECLINES LIKELY

Still, 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 rising into 2009, the company said.

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 its sister company, Freddie Mac.

Freddie Mac, too, is expected to post a big loss when it reports its first-quarter results next week.