Fannie plunges on capital-raising plan

Fannie Mae (FNM) is tightening its belt. The big mortgage lender said Tuesday it would cut its quarterly dividend and raise $6 billion in new capital to replenish its accounts after its latest quarterly loss. Fannie lost $2.2 billion, or $2.57 a share, for the quarter ended March 31, reversing the year-ago profit of $961 million, or 85 cents a share. The latest quarter was hit by a sharp rise in credit costs,  Fannie said in a filing with the Securities and Exchange Commission. Its shares dropped 13% in early trading Tuesday.

“During the first quarter we saw heightened volatility in the secondary mortgage market, credit spreads that widened out to 22-year highs, and home prices that fell faster than expected,” said CEO Daniel H. Mudd. “Our first quarter results, although an improvement over the last quarter, reflect these challenging market conditions.” The latest quarter included $4.4 billion in fair value losses, reflecting markdowns on the value of Fannie’s derivatives holdings and trading positions.

The announcement comes just a day after Fed chief Ben Bernanke called on Fannie and sibling Freddie Mac (FRE) to play a bigger role in easing the pain of the U.S. housing bust. Fannie said in its filing Tuesday morning it will “announce a series of new initiatives called ‘Keys to Recovery’ on its Tuesday earnings conference call. The plan, which includes the refinancing of underwater loans, “is geared toward providing liquidity, stability and affordability to the housing and mortgage markets for the long term, keeping struggling borrowers in their homes, assisting prospective homebuyers with home purchases, and stabilizing communities affected by the mortgage market downturn,” the company said.

In part, the decision to raise new capital reflects both the declining health of the mortgage market and Fannie’s expanding role in treating those ills. Fannie said the capital-raising plan - which includes $2 billion in common stock and $2 billion in each of two classes of preferred stock - and the dime-a-share dividend cut, to 25 cents a share, will enable it “to operate and grow from a position of strength.” Judging by Tuesday’s market reaction, though, investors aren’t so sure.