SOUR LOANS = SWEET OPPS: Fannie Mae set a share price today to for an investment opportunity designed to shore up its losses from home loans gone bad. The bursting of the housing bubble can offer savvy, patient investors ways to harness the housing bear market. Story below.
WASHINGTON (AP)— Mortgage finance company Fannie Mae on Thursday set a $25 a share price for the $7 billion in stock its selling next week to stabilize finances as losses from soured home loans pile up.
The company, which finances or guarantees one of every five home loans in the U.S., said Tuesday that it would sell the preferred stock and cut its dividend by 30 percent, to 35 cents a share, starting in the first quarter of 2008.
Wall Street responded robustly to Fannie’s stock offering, as it did last week to the $6 billion sale of preferred stock — also at $25 a share — by Freddie Mac, Fannie’s smaller government-sponsored
competitor in the $11 trillion home-loan market. With a price of $25 each, the 280 million shares of preferred stock being sold next Tuesday have a fixed dividend rate of 8.25 percent.
That’s a smaller payout for investors than the 8.375 percent in Freddie’s special stock sale. Fannie’s dividend is locked in through 2010, Freddie’s through 2012. Fannie shares gained $2.61, or 7.22 percent, in trading Thursday to finish at $38.74 but later lost a dollar in after-hours trading, at $37.74. The company’s pricing announcement came after the close of regular trading. Investors are keeping a close eye on the offerings, as they gauge the damage inflicted by the turmoil this year in the credit and housing markets.
Washington, D.C.-based Fannie warned investors Wednesday that its losses would mount next year from bad mortgages. Its mortgage investments declined by $9 billion in November, compared with October, as it shed holdings to raise capital in the wake of a $1.4 billion loss in the third quarter.
Fannie and Freddie have had to set aside billions of dollars to account for bad loans, eroding their profits at a time when home prices are falling and foreclosures are rising on high-risk mortgages. The entire $7 billion in preferred Fannie stock will not be convertible into common stock.
Converting stock into common stock dilutes the value of outstanding shares and could depress stock prices.
Typically, preferred stock pays a higher dividend than common stock and carries a stronger claim on the assets of a company if it goes into bankruptcy.
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