Fannie Mae, the largest source of money for U.S. home loans, cut its dividend 30 percent yesterday and said it will sell $7 billion of preferred stock to bolster capital as the housing crisis deepens.

The quarterly payout will drop to 35 cents a share from 50 cents starting in the first quarter, Washington-based Fannie Mae said in a statement yesterday. The government-chartered company plans to issue the preferred stock later this month.

The worst housing slump in at least two decades will hurt fourth-quarter earnings "in a material way" and continue to weigh on 2008 results, Fannie Mae said. The decision to shore up capital follows a similar move last week by McLean, Va.-based Freddie Mac. Fannie Mae said last month it had a capital cushion of $2.3 billion after reporting a quarterly loss of $1.4 billion.

"There may be more losses," said David Dreman, who oversees $22 billion, including Fannie Mae shares, as chairman of New Jersey-based Dreman Value Management LLC. "Raising more capital will allow them to go out and start growing again" by leveraging the government-chartered status and continuing to expand the business of guaranteeing mortgage bonds.

Fannie Mae dropped $1.28, or 3.6 percent, to $33.90 in late New York Stock Exchange trading. Credit-default swaps tied to the company's senior unsecured bonds rose 2 basis points to 42, according to broker Phoenix Partners Group in New York. An increase in the contracts, used to speculate on Fannie Mae's creditworthiness, suggests deterioration in investor confidence.

The preferred stock sale will be managed by Lehman Brothers Holdings Inc. and Merrill Lynch & Co., the company said.

Fannie Mae, which owns or guarantees about one in five U.S. home loans, reported the record third-quarter net loss because of the effect of rising mortgage defaults and foreclosures. Fannie Mae's loan loss ratio could at least double to 8 to 10 basis points next year, chief executive Daniel Mudd said in a conference call with analysts on Nov. 9.

The ratio was 4 basis points for the nine months ended Sept. 30, and 1.8 basis points in the year-ago period, according to a company filing that day with the Securities and Exchange Commission.

Freddie Mac sold $6 billion in preferred stock last week and cut its dividend in half after bad loans reduced the company's core capital cushion by two-thirds last quarter, leaving it with just $600 million more than the federally required reserve level.

Fannie Mae is "affected by the same developments in the market that Freddie Mac is," said Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC. "I would view this as a little more opportunistic than Freddie Mac's move, but credit issues are issues for both of them."

Fannie Mae last month raised $500 million in preferred stock.

The company said the new actions will help it "maintain a solid capital position through 2008." It will "strengthen Fannie Mae's ability to manage the effects of ongoing volatility in the mortgage credit markets, continue to grow its securitization activities and pursue attractive investment opportunities," the statement added.