US mortgage giant in share issue

US mortgage giant Fannie Mae is to sell $7bn of shares to raise money to cushion itself against losses in sub-prime home loans.

The additional capital will allow the company to "manage increased risk in the housing and credit markets".

Fannie Mae, which finances or guarantees one of every five home loans in the United States, will also cut its dividend by 30%.

This follows similar moves by smaller rival Freddie Mac.

Fannie Mae last month reported a third-quarter loss of $1.4 bn.

Bad times

The company said that worsening housing and credit markets will hurt its fourth quarter and 2008 results.

"Fannie Mae has a responsibility to serve the mortgage market in good times and in times like these," Daniel Mudd, Fannie Mae's chief executive officer, said in a statement.

"The steps we are taking today are designed to enable us to meet that responsibility."

Its sister firm Freddie Mac said last month it is to sell $6bn of shares to cover more bad debt losses.

Higher mortgage rates

The ongoing US mortgage industry crisis has been caused by record loan defaults in the sub-prime sector, which specialises in higher risk loans to people on lower incomes or those with poor credit histories.

The record defaults over the past year have been sparked by higher US mortgage rates.

This has subsequently spread to the wider credit markets, as most of the sub-prime mortgage debt was repackaged into wider debt offerings which were then sold on.

Freddie Mac and Fannie Mae were created by the US government but later privatised.

They are still known as government-sponsored enterprises and are still able to borrow at a lower rate of interest because bond markets believe that the US government would not allow them to go bankrupt