Capital Markets

Fannie Mae to Tap Equity Markets for $6B

U.S-sponsored mortgage lender, in reporting a $2.2B quarterly loss and cutting its dividend, sees housing weakness ahead — and the need for "stabil...
Stephen TaubMay 6, 2008

Fannie Mae’s latest effort to raise capital will come at the expense of its equity holders.

The struggling mortgage lender, which reported a $2.2 billion quarterly loss on Tuesday morning, said it will seek to raise $6 billion through a mixture of common, preferred, and convertible preferred stock.

“The new capital will enable Fannie Mae to maintain a strong, conservative balance sheet, enhance long-term shareholder value, and provide stability to the secondary mortgage market,” the company said in a press release.

In addition, it is cutting its third-quarter dividend to 25 cents a share from 35 cents, noting that the move will save the company $390 million per year.

Fannie also said that its regulator, the Office of Federal Housing Enterprise Oversight (Ofheo), lifted a May 2006 consent order, which will enable the company to reduce from 20 percent to 15 percent its capital requirement once it completes its capital raising plan. In addition, Fannie said the regulator will cut the requirement to 10 percent in September, provided the company maintains excess capital well above the Ofheo’s regulatory requirement, and no material adverse change to the company’s ongoing regulatory compliance.

Fannie Mae blamed its huge quarterly loss on the “ongoing disruption in the housing, mortgage and credit markets,” and singled out certain specific trends: increases in mortgage delinquencies, defaults and foreclosures, home price declines, lower interest rates, significantly wider credit spreads on securities, and reduced levels of liquidity in the mortgage and credit markets.

Fannie also warned that it expects severe weakness in the housing market to continue in 2008. “We expect home prices to decline 7 to 9 percent on a national basis in 2008, with significant regional differences in the rate of home price decline, including steeper declines in certain areas such as Florida, California, Nevada and Arizona,” it stated.

It further warned that the housing market weakness will lead to increased delinquencies, defaults and foreclosures on mortgage loans, and slower growth in U.S. residential mortgage debt outstanding in 2008.

As a result, it expects the downturn in the housing market and the disruption in the mortgage and credit markets to continue to adversely affect its financial results in 2008. It also expects its credit losses to increase in 2009 relative to 2008.

TheNew York Times pointed out in a front page article on Tuesday, before Fannie reported its results, that some financial experts worry that Fannie and its sister government-sponsored mortgage company, Freddie Mac, are dangerously close to the edge, especially if home prices go through another steep decline. The paper noted that the combined $83 billion in capital that their regulator required them to hold backstops $5 trillion in debt and other financial commitments.