Mortgage finance company Fannie Mae announced on Tuesday 4 December that it would sell $7 billion of preferred stock and cut its dividend by 30 per cent to shore up its capital base through 2008. The company warned that soaring credit-related expenses would hurt fourth-quarter earnings, while further declines in home prices would probably dent 2008 results.

The Fannie Mae stock sale follows the November issue of $6 billion in preferred shares by Freddie Mac, the other housing-related government-sponsored enterprise, to prepare for credit losses and maintain its ability to purchase and guarantee mortgages.

Both companies - which unnerved investors with third-quarter losses of $1.5 billion and $2 billion - have increased their roles in the housing market this year. But they have to balance growth with constraints imposed by the federal regulator.

That is why they need extra capital, since the companies have committed some $11 billion in accounting errors. Fannie Mae also said it would also cut its quarterly stock dividend starting from the first quarter of 2008, to 35 cents a share from 50 cents.