Fannie Mae (FNM), the govern-sponsored mortgage finance behemoth announced Tuesday that it would be cutting its dividend by 30 percent, while selling $7 billion in preferred stock to raise much needed capital. The dividend will drop to 35 cents a share beginning in the first quarter.
The company was encouraged by investor response to Freddie Mac's (FRE) $6 billion offering of preferred stock last week, and feel there's a strong demand for the offering.
Buyers of the preferred stock will not be able to convert shares to common stock, as it would dilute their value and keep share prices down.
The added value of preferred stock is it will most the time offer higher dividends than common stock, as well as be in a stronger position to claim assets if a company ends up going bankrupt.
When you included financing and loan guarantees, Fannie Mae is involved with 20 percent of home loans in the U.S. The company lost $1.4 billion during the third quarter.
The preferred stock offering is an attempt to bolster their financial position in potential losses for sub-prime mortgages.
Offering the reason for the actions, president and CEO of Fannie Mae, Roger Mudd said, "Fannie Mae has a responsibility to serve the mortgage market in good times and in times like these. The steps ... are designed to enable us to meet that responsibility with a comprehensive, conservative plan to serve the market and manage our capital. The market needs us to be there — and we believe this plan will help us do that."
Like I said, this is really a way to cover their butts in case of heavy mortgage losses. The reasons for doing were made to sound good by Mudd though weren't they?
The company projected the continual problems in the housing and credits markets will cause the company to struggle next year.
Managing the stock offering for Fannie Mae is Merrill Lynch & Co. (MER) and Lehman Brothers Holdings Inc. (LEH).
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