Fannie Mae cut its quarterly dividend in half as part of the GSE's effort to build the capital required by its regulator the Office of Federal Housing Enterprise Oversight. Cutting Fannie's common dividend by 50% to $0.26 is expected to improve its relations not only with OFHEO but with Congress as well.

In a report released after the announcement of the cut was made, Banc of America Securities analysts said that by cutting its dividend, Fannie would be saving roughly $500 million in the next two quarters and making it better capitalized. BofA analysts think this is neutral for agency debt spreads. However, they said that this should be slightly positive for mortgage-backed spreads.

BofA stated that despite the cut, there is still concern that Fannie Mae might still liquidate a portion of its MBS portfolio, so that it could diminish its asset size and lower its capital requirement. Although BofA does not expect a wholesale liquidation, analysts acknowledge that Fannie could sell some of its mortgage-backeds that have unrealized gains, amounting to $9 billion as of June 2004.

Meanwhile, JPMorgan Securities said that the dividend cut could help improve the GSE's relations with OFHEO and Congress. This shows more of a willingness on management's part to compromise as well as reflects the GSE's focus on improving its capital position. "It is very important for Fannie to show Congress that its culture is becoming less contentious following the departure of the previous management regime," JPMorgan analysts wrote.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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