Freddie Mac cuts dividend, slates $6 billion preferreds

By Jennifer Ablan and Al Yoon

NEW YORK (Reuters) - Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), the second largest provider of financing for U.S. home loans, on Tuesday said it halved its quarterly dividend and will sell $6 billion in preferred stock to bolster capital in anticipation of mortgage-related losses.

Freddie Mac's move to buoy its waning capital base follows $2 billion in third-quarter losses on soaring credit expenses tied to worsening credit on mortgages it owns or guarantees, and expectations the housing slump will deepen.

The company last week had warned that it may slash its dividend and further pare its $700 billion investment portfolio in addition to a possible preferred stock offering. The government-sponsored enterprise, or GSE, had said it was aiming to raise enough capital to last through 2008.

"This is the first step in my view, they might have to do more," said Rajiv Setia, a strategist at Barclays Capital in New York. "What this does is really protect them for the next few quarters from any adverse marks to their portfolio."

Freddie Mac's board on Monday approved a quarterly common stock dividend of 25 cents per share, a 50 percent drop from the previous quarter, as part of its strategy of meeting a capital surplus mandated by its federal regulator, the McLean, Virginia-based company said in a statement.

The capital management plan "will be used to bolster the company's capital base in light of actual and anticipated losses necessitated by" accounting requirements, Richard Syron, Freddie Mac's chief executive officer, said in the statement. That should provide enough capital to operate through the current market environment, he added.

Stress at Freddie Mac and larger Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) has stunned investors who see losses as evidence the mortgage crisis once limited to subprime loans has spread to prime mortgages that make up most of the companies' businesses. Freddie Mac has invested in subprime loans to a greater extent than Fannie Mae, leaving it more exposed as home prices fall and foreclosures rise.

The GSEs have been hailed as some of the last resorts to stabilize the housing market as investors burned by subprime losses pull support for securities that had been cheaper sources of funding for U.S. lenders. Raising capital through preferred stock allows Freddie Mac to continue raising money for loans through mortgage bond issuance and purchases for its portfolio, analysts said.