Fannie Mae taps investors for $6bn and cuts dividend after $2.2bn loss

Fannie Mae, the US government-backed financial business charged with propping up the mortgage market, told its shareholders they would have to accept lower dividends and a smaller say in the company as it steps in to ease the credit crisis.

The company raised $6bn in new funding, diluting existing shareholders, and cut the dividend pay-out after posting an unexpectedly large $2.2bn loss in the past three months. Rising defaults by homeowners and losses on mortgage derivatives were among the reasons for the red ink, and the financial results raised concerns about Fannie Mae's ability to act as a prop to the housing market.

The company – along with its sector mate Freddie Mac – buys and sells mortgages and mortgage-backed securities, providing liquidity to the market and helping to encourage mortgage lending and widen home ownership in the United States. Both companies have been given permission to extend their activities in response to the credit crisis.

The weaker their own finances, the less money they have to spend buying mortgages in the market, which might discourage lenders from making the loans that struggling borrowers need to refinance.

However, Daniel Mudd, the chief executive of Fannie Mae, sought to reassure investors on a conference call to discuss yesterday's results.

"Right now we are in the belly of this cycle, but the initial period of disruption in the market-place appears to be dissipating. The capital markets are recovering balance, and as the market recovers, we will be a prime beneficiary," Mr Mudd said.

Fannie Mae shares rebounded sharply after the conference call but Moody's, the credit-rating agency, downgraded some of the company's debt and analysts remained cautious.