Fannie Cuts Dividend to Conserve Capital

Fannie Mae on Tuesday cut its quarterly dividend to 26 cents a share, from 52 cents, to conserve capital after making accounting errors. Shares of the company, which is the biggest buyer of U.S. mortgages, fell in extended trading.

The new dividend is payable Feb. 25 to shareholders of record Jan. 31, the Washington-based company said. The move comes after a $5-billion sale of preferred stock in December that the company said was part of its plan to increase capital.

Fannie Mae announced the cut after exchanges closed. Its shares, which rose 19 cents to $69.70 in regular trading, sank as low as $68.16 in the after-hours market.

Many investors anticipated Fannie Mae would be able to raise capital without cutting the dividend mainly by slowing its growth and through the preferred stock sale.

“This was not expected,” said Edwin Groshans, an analyst at Fox-Pitt Kelton in New York. “The common stock dividend was on the table, but we were not anticipating that it be one of the first levers pulled” to raise capital, he said.

Fannie Mae in September agreed to build a 30% capital surplus after its regulator, the Office of Federal Housing Enterprise Oversight, found it broke rules in accounting for hedges on its more than $900-billion portfolio of mortgages and mortgage assets, used improper “cookie jar” reserves and improperly deferred expenses.

The Securities and Exchange Commission agreed with the oversight office in December that the company should fix its accounting.

The dividend cut saves Fannie Mae about $1 billion this year, Groshans said.

“The board of directors believes this is a prudent and responsible action to take as the company moves expeditiously to increase its capital,” Fannie Mae Chairman Stephen Ashley said in a statement.

Like the smaller Freddie Mac, Fannie Mae was chartered by the government to make funds more available to lenders for home loans. The two companies own or guarantee about half the $7.6-trillion mortgage market. Fannie Mae, the second-largest debtor in the U.S. after the government, makes money on the difference between its cost of capital and income from its mortgage assets.

“I agree with the board’s decision to cut the common stock dividend by 50%,” oversight office director Armando Falcon said in a statement. “This action demonstrates the board’s commitment to taking necessary measures to increase the company’s capital.”