Fannie Halves Dividend

The big mortgage company cites a need to build capital as regulators tighten their grip.
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Fannie Mae (FNM) slashed its quarterly common stock dividend Tuesday in a bid to satisfy regulators who have questioned the mortgage giant's financial footing.

The Washington-based company said it will pay a 26-cent dividend Feb. 25 to shareholders of record Jan. 31. Fannie, which has around 967 million shares outstanding, stands to save $251 million this quarter with the reduced payment. Shares of Fannie fell 2% in after-hours trading as investors digested the news.

The move comes just a month after Fannie's main regulator, the Office of Federal Housing Enterprise Oversight, and the

Securities and Exchange Commission

forced the company into a massive accounting change that resulted in the departure of Fannie's top two executives.

The OFHEO ruling, together with the SEC's stance, meant that Fannie has to raise about $9 billion to put its books in order. The company raised some $4 billion late last month with a

big preferred stock placement.

Fannie said Tuesday that reducing the common stock dividend will "contribute toward building Fannie Mae's capital to a 30% surplus over its minimum capital requirement."

"The Board of Directors believes that this is a prudent and responsible action to take as the company moves expeditiously to increase its capital," said nonexecutive chairman Stephen Ashley.

Fannie has been in turmoil since the SEC's top accountant ordered the company to restate its earnings for the past four years. The SEC effectively ratified OFHEO's findings of last fall. That agency concluded that the government-sponsored entity used improper accounting methods for valuing derivatives -- sophisticated financial instruments the company uses to hedge against interest rate swings.

The faulty accounting could force Fannie to report after-tax losses on its derivatives transactions of as much as $9 billion. Some analysts say the final sum could be even higher.

The big losses are critical to Fannie, since the company is required to comply with a minimum capitalization standard set by OFHEO, the company's primary regulator.

Fannie Mae also said Tuesday it has submitted a capital restoration plan to OFHEO for its review and approval and is working with OFHEO to address any comments or concerns. "We look forward to continue working with OFHEO to attain the capital restoration plan," Ashley said.

In after-hours action Tuesday, Fannie slipped $1.50 to $68.20.