Updated from 4:47 p.m. EST

Washington Mutual ( WM) is slashing its dividend and looking to raise $2.5 billion through a preferred stock sale as part of a plan to shore up its balance sheet amid the slumping housing and credit markets.

The Seattle lender plans to cut its quarterly dividend by 41 cents a share to 15 cents. It will also offer $2.5 billion worth of convertible preferred stock to bolster its capital positioning and significantly shrink its home lending business.

WaMu expects to generate about $3.7 billion in tangible equity through the offering and dividend cut, it says.

The company also plans to "resize" and make a "significant change in the strategic focus" to its home lending business. The plan includes cutting 22% of its 2,600-employee home lending unit and shuttering more than half of its 336 home loan centers. The bank also will no longer make home loans to subprime borrowers.

"A substantial infusion of new capital, significant expense reductions, the major change in our home loans business and our planned dividend reduction all combine to further fortify WaMu's strong capital and liquidity position," Chairman and CEO Kerry Killinger said in a statement. "These actions will also better position us to pursue various initiatives, particularly in our leading retail banking business -- which is at the core of our business strategy."

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