Start the conversation
By Staff Reports
Federal National Mortgage Association, more commonly known as Fannie Mae (FNM), became the latest casualty of the subprime mortgage crisis when it announced plans last week to issue $7 billion of nonconvertible preferred stock in a bid to raise much-needed cash. Monday, the firm announced it would also sell $6 billion in short-term benchmark bills.
“[Fannie Mae] continues to believe that conditions in the housing and credit markets, including expected further declines in home prices, will negatively affect the company’s financial position, and results of operations in 2008. Overall economic conditions in 2008 could also materially affect future performance,” Fannie Mae said in a news release.
Fannie Mae’s limited exposure to subprime lending was supposed to hedge the company from the collapse of the housing market. Fannie Mae’s Chief Operating Officer,, told Reutersin February that subprime investments represent “well below 2 percent of our book.”
Together, with its sister company Freddie Mac (FRE), the two mortgage giants own or guarantee 40% of the $11.5 trillion home loan market. With such a large book of business and limited exposure to subprime loans, the two firms’ current troubles may be a sign that the subprime mortgage crisis is spilling over into higher credit quality sectors of the mortgage industry.
Freddie Mac was the first to cave, selling $6 billion in preferred stock, and slashing its dividend by 50% in November. Fannie Mae followed suit with a similar offer of $7 billion in preferred stock and a 30% reduction of common stock dividends, from 50 cents to 35 cents, beginning in January.
Fannie Mae has tried to position itself to help those adversely affected by the credit crisis, but that goal may prove out of reach with a share price that has dropped more than 37% year-to-date and continued cash flow problems.
Fannie Mae and Freddie Mac, by contrast, seem guaranteed to survive the real estate crisis – though both will absorb a number of lumps along the way.
News And Related Story Links:
- Market Watch:
Fannie Mae Cut To Underperform By Credit Suisse
- Money Morning:
Freddie Mac Takes a $2 Billion Hit, Stock Drops Nearly 30%