Fannie Mae will cut its dividend

Fannie Mae, the largest source of money for U.S. home loans, said it would cut its dividend 30% and sell $7 billion of preferred stock this month to bolster capital depleted by the housing crisis.

The quarterly payout will be reduced to 35 cents a share from 50 cents starting in the first quarter, Washington-based Fannie Mae said Tuesday.

The housing slump will hurt fourth-quarter earnings “in a material way” and weigh on 2008 results, the government-chartered company said. Fannie Mae last month said it had a capital cushion of $2.3 billion after reporting a third-quarter loss of $1.4 billion.

The move to shore up capital, which follows a similar move last week by rival Freddie Mac, was announced after the stock market closed. Earlier, Fannie Mae shares fell $1.07, or 3%, to $35.18.

Fannie Mae said the actions announced Tuesday would help the company “maintain a solid capital position through 2008” as well as help it “manage the effects of ongoing volatility in the mortgage credit markets.”

Congress created Fannie Mae and Freddie Mac to increase mortgage financing by buying loans from lenders. The companies profit by holding mortgages and mortgage bonds as investments and by charging fees to guarantee and package loans as securities. The firms record losses when defaults rise.