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Fannie Mae Halves First-Quarter Dividend

Move Designed to Increase Capital

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, January 19, 2005; Page E01

Fannie Mae yesterday cut the dividend on its common stock in half to help meet regulators' requirement that it bolster its cash reserves.

It was the first time since 1981 that the government-chartered mortgage-funding company cut its common stock dividend, company spokeswoman Janis Smith said. The reduction brought the dividend to 26 cents a share for the first quarter of 2005, lower than it has been since the end of 1998, Smith said.

To boost its capital, District-based Fannie Mae has sold $5 billion worth of stock and is cutting its dividend. (Jay Mallin -- Bloomberg News)

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Based on the number of shares outstanding Fannie Mae reported in mid-2004, the dividend cut would save the company $251.7 million.

The action was another blow to investors who have seen billions of dollars of stock value evaporate since September, when regulators accused Fannie Mae of manipulating its accounting. Last month, the scandal cost chief executive Franklin D. Raines and chief financial officer J. Timothy Howard their jobs.

The 26-cent dividend was approved by the Office of Federal Housing Enterprise Oversight, which is still reviewing a broader plan the company has submitted to raise capital. OFHEO declared Fannie Mae "significantly undercapitalized" in December, after the staff of the Securities and Exchange Commission ruled that Fannie Mae had improperly accounted for financial contracts known as derivatives, which the company says it uses to hedge against risks.

Fannie Mae has estimated that correcting those problems could require it to record $9 billion of losses that it had kept off its income statements, and OFHEO said those losses would leave Fannie Mae about $3 billion short of its minimum capital requirement of $31.8 billion as of Sept. 30.

But Fannie Mae had to recoup more than just $3 billion because it had already committed to achieving a surplus of 30 percent more capital than the minimum requirement. The capital is a cushion the company is required to maintain itself against a financial downturn.

Fannie Mae last month announced that it was selling $5 billion of preferred stock to institutional investors as part of its effort to boost capital. The dividend cut was meant to "accelerate" the increase, Fannie Mae said in a news release.

"The Board will continue to assess dividend payments for each quarter, and OFHEO has indicated that it will continue to review dividend payment requests for each quarter based upon the facts and conditions existing at the time," Fannie Mae said.

"This action demonstrates the Board's commitment to taking necessary measures to increase the company's capital," OFHEO Director Armando Falcon Jr. said in a statement.

In another development yesterday, Rep. Richard H. Baker (R-La.), chairman of a House subcommittee that oversees Fannie Mae, criticized the company's response to a mortgage scam perpetrated by a North Carolina lender called First Beneficial Mortgage Corp.

After Fannie Mae discovered that First Beneficial had sold it fraudulent loans, Fannie Mae resold the loans to First Beneficial, which then unloaded them on Ginnie Mae, a government agency, according to the Justice Department.

In a letter to Baker and other lawmakers that Baker released yesterday, Fannie Mae's acting chief executive, Daniel H. Mudd, said the company resold mortgages to First Beneficial in 1998, 1999 and 2000 after discovering that the properties underlying some of the loans were vacant or under construction.

Fannie Mae's Atlanta office received a call in 1998 from an investigator for the North Carolina State Banking Commission saying First Beneficial was attempting to sell loans to Ginnie Mae, but the investigator didn't say those loans were Fannie Mae loans, Mudd wrote. Separately, in a conversation with a Fannie Mae employee, a First Beneficial employee "speculated that First Beneficial might be trying to buy loans back from Fannie Mae and sell them to Ginnie Mae," Mudd wrote.

Mudd said Fannie Mae "may have been able to take further steps to investigate and determine whether First Beneficial was engaging in conduct that amounted to fraud."

"Yet to be determined is what accountability, if any, Fannie brought to bear on those at the company responsible for overseeing this activity and what knowledge they had that the activity was fraudulent," Baker said in a news release.

"The lax internal oversight described by Fannie Mae in the First Beneficial fraud makes clear the need for robust external oversight and for regulatory reform to be passed by Congress this year," Baker said.

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