Fannie Follows Freddie: Will Raise Capital, Cuts Dividend

Fannie Mae said today it will take steps to increase capital, announcing a 30 percent dividend cut and a $7 billion offering of preferred stock. The move comes on the heels of a similar move at GSE rival Freddie Mac, who likewise cut its fourth-quarter dividend in late November and said it would offer $6 billion in preferred stock.

The dividend will drop to 35 cents a share from 50 cents starting in the first quarter, Fannie said in a statement today. It expects to issue the preferred shares later this month.

The GSE cited worsening housing and credit markets, continued losses on certain guaranty contracts, substantial credit-related expenses, and fair value losses on derivatives and securities as likely affecting “in a material way the company’s fourth quarter 2007 results” — and said that it expects similar strain on operating results in 2008 as well.

In addition to citing the housing markets as a drag on the company’s near-term operating performance, Fannie also included the following language in its statement:

Overall economic conditions in 2008 could also materially affect future performance.

It’s a small statement with large meaning.

The translation: a recession seems likely enough to us that it warranted mention in our 2008 guidance.