Fannie Mae prices preferred at $25

WASHINGTON - Mortgage-finance company Fannie Mae set a price of $25 a share yesterday for the $7 billion in stock it is selling next week to stabilize finances as losses from soured home loans pile up.

The company, which finances or guarantees 1 of every 5 home loans in the United States, announced Tuesday that it would sell the preferred stock and cut its dividend 30 percent, to 35 cents a share, starting in the first quarter of next year.

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 Tuesday have a fixed dividend rate of 8.25 percent. That is 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 yesterday to finish at $38.74, but later lost a dollar at one point 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-based Fannie warned investors Wednesday that its losses would mount next year from bad mortgages. Its mortgage investments declined $9 billion in November from 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 on high-risk mortgages are rising.

The entire $7 billion in preferred Fannie stock will not be convertible into common stock. Converting preferred 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.