NEW YORK – Fannie Mae (FNM), the embattled U.S. home financing company, on Wednesday said it agreed to sell $5 billion in preferred stock to institutional buyers as part of an effort to comply with regulatory demands to increase capital.
The stock sale pricing announcement comes eight days after Franklin Raines (search) stepped down as Fannie Mae's chief executive and Timothy Howard stepped down as its finance chief. Those resignations came after financial regulators exposed accounting errors that will force Fannie Mae to restate 3-1/2 years of earnings, resulting in a multibillion-dollar shortfall.
"This placement of preferred stock is a key component of Fannie Mae's capital restoration plan," Donald Marron, former chairman of brokerage giant Paine Webber and a Fannie Mae board member who is spearheading the company's compliance efforts with regulators, said in a statement.
Fannie Mae is the largest buyer of U.S. home mortgages, which it either keeps or repackages as securities for sale to investors. The company is currently below its minimum capital requirement, but had agreed to boost capital to 30 percent over the minimum by mid-2005 because of the accounting controversy.
Fannie Mae, with a stock market value of about $67.6 billion, has seen its shares fall 6.2 percent this year, compared with a 9.1 percent rise in the Standard and Poor's 500 index (search).
The company said $2.5 billion of the new securities would be outright preferred shares, while the remainder would be comprised of convertible shares. Lehman Brothers Holdings Inc. (LEH) acted as placement agent for the sale, Fannie Mae said.
Convertible securities are hybrids that usually offer current income and can be converted into company stock. Shares often fall after a company announces a convertible sale because some investors sell the underlying common stock short, and conversion may dilute that stock.
The Securities and Exchange Commission recently agreed with Fannie Mae's financial regulator, the Office of Federal Housing Enterprise Oversight (search), that the company misused accounting standards.
"Working with OFHEO, we will be finalizing the details of the capital plan shortly," Marron said in the statement.