Fannie Mae Cuts Dividend by 30%; Shares Fall

Fannie Mae said after markets closed Tuesday that it will sell $7 billion of preferred stock and cut its dividend 30 percent to shore up its capital position through 2008.

The sale or sales this month would follow the November issuance of a record $6 billion in preferred shares from Freddie Mac , the other government-sponsored home lending enterprise, to prepare itself for credit losses and maintain its ability to purchase and guarantee mortgages.

"Fannie Mae has a responsibility to serve the mortgage market in good times and in times like these," Daniel Mudd, Fannie Mae's chief executive officer, said in a statement. "The steps we are taking today are designed to enable us to meet that responsibility."

Shares of Fannie Mae dropped more than 4 percent to $33.66 after the bell on Tuesday.

Fannie Mae said it intended to move quickly as conditions for financial institutions seeking access to capital have improved markedly, Fannie Mae Treasurer David Benson said in the statement. Lehman Brothers and Merrill Lynch will host roadshows starting on Wednesday, a source said.

Both Fannie Mae and Freddie Mac reported staggering third-quarter losses last month, fraying their image as stalwarts of the mortgage industry.

Fannie Mae and Freddie Mac have traditionally been major sources of funding for banks and other mortgage lenders by buying up mortgages they make and then bundling them as securities for sale to investors.

Industry experts say a reduced role by either company could ripple across the housing market.

© 2009 CNBC