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Fannie Mae To Sell $5-Billion Of Its Stock

Fannie Mae has recently announced that it will sell an aggregate of $5 billion in two placements of preferred stock to qualified institutional buyers.  This represents the largest capital placement ever undertaken by the mortgage-financing giant.

The announcement came fresh on the heels of recent controversy in which the comapny is embroiled in accusations of fraud.  The Attorney General of Ohio had slapped Fannie Mae with a class-action lawsuit, accusing the company of fraudulently manipulating its earnings to increase the price of its stock.  The lawsuit claims that Fannie Mae and its top executives purposely inflated the price of its publicly traded common stock to deceive investors about the financial state of the company.  These deceptions may have cost shareholders billions of dollars.

Consequently, the company has been the focus of a federal investigation by the Securities and Exchange Commision (SEC) who are examining the company's accounting records.  Many predict that the audit could knock out about $9-billion from Fannie Mae's past profits.  The recent controversy has resulted in the forced resignation of Fannie Mae Cheif Executive Officer - Franklin Raines, and Cheif Financial Officer -  J. Timothy Howard. 

The sale of preferred stock has now become a key component of Fannie Mae's capital restoration plan.  The company is working on developing a capital plan with the Office of Federal Housing Enterprise Oversight (OFHEO), who has a mission to ensure financial safety and soundness of Fannie Mae.  With the $5-billion preferred capital offering, Fannie Mae will not need to make any sales out of its portfolio.

Preferred Stock:

  • The $2.5 billion series of 5.375 percent Non-Cumulative Convertible Series 2004-1 Preferred Stock has a stated value and liquidation preference of $100,000 per share and is convertible by holders into shares of Fannie Mae common stock at a conversion price of $94.31.
  • Fannie Mae also priced $2.5 billion of Non-Cumulative Preferred Stock Series O with a stated value of $50 per share and is a non-convertible floating rate preferred stock with an original coupon of 7 percent.

Fannie Mae the largest non-bank financial services company in the world.  Fannie Mae was originally established by Congress to keep mortgage funds for the nation's housing market flowing steadily.  The corporation securitizes and either resells or owns a hefty portion of the country's outstanding mortgage debt, along with its relative Freddie Mac.  Since 1968, Fannie Mae has provided $6.3 trillion of mortgage financing for 63 million families.