Fannie Mae to Issue $7 Billion In Stock to Help Steady Itself

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, December 5, 2007

Fannie Mae, weakened by deterioration in the housing market, said yesterday that it planned to raise $7 billion of new capital to help it stay on solid financial footing.

The federally chartered investor in home mortgages said it would also reduce the quarterly dividend it pays shareholders from 50 to 35 cents per share during the first quarter of next year.

The announcement was further evidence that even Fannie Mae and Freddie Mac, the giants of the mortgage funding business, have been knocked off stride by the effects of a nationwide debt bubble.

In a news release after the markets closed yesterday, Fannie Mae predicted that further erosion in the housing and credit markets would hurt its financial results for the rest of this year and next year.

The plan to raise $7 billion through the sale of preferred stock exceeds a similar offering last week by McLean-based Freddie Mac, which raised $6 billion to shore up its capital. It also comes on the heels of a smaller, $500 million preferred stock offering by District-based Fannie Mae earlier last month.

Both companies play important roles in the nation's housing finance system, channeling funds from global investors to the lenders that issue mortgages. They were chartered by the government to keep mortgage money flowing.

In the aftermath of accounting scandals at the companies, the government increased by 30 percent the amount of capital they are required to maintain as cushions against financial troubles. Recent setbacks left the companies operating with relatively thin capital surpluses, potentially constraining their operations.

In its latest quarterly report, Fannie Mae warned that, in order to stay in compliance with the capital requirement, it might have to sell assets, issue additional securities or pass up opportunities to invest in mortgages, a major source of profit.

As of Sept. 30, Fannie Mae's capital totaled $41.7 billion, which exceeded the requirement by $2.3 billion. To put that in perspective, in October, the company held $732.3 billion of mortgage-related investments, had debts of $763.9 billion, and guaranteed payments on $2.3 trillion of mortgage-backed securities.

Selling preferred stock is like borrowing money. The company promises new investors a specific dividend rate. In the process, it can reduce returns for preexisting investors.

Fannie Mae spokesman Brian Faith would not say how large a return the company is offering on its non-convertible preferred stock.

However, Paul Miller, an analyst at the Arlington investment firm Friedman, Billings, Ramsey Group, predicted the rate could exceed 8 percent, compared with past offerings in the range of 5 to 6 percent. Last week, Freddie Mac promised 8.375 percent.

"The problem is, it's very expensive capital," Miller said, adding that the need to pay such a high rate would not bode well for the company's long-term profitability.

"Fannie Mae has a responsibility to serve the mortgage market in good times and in times like these," Daniel H. Mudd, the company's chief executive, said in the news release. "The steps we are taking today are designed to enable us to meet that responsibility with a comprehensive, conservative plan to serve the market and manage our capital."

Fannie Mae's stock closed at $35.18, down 2.95 percent for the day and about 50 percent below its high for the past year.

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