May 6 (Bloomberg) -- Fannie Mae, the largest U.S. mortgage- finance company, reported a wider loss than analysts estimated, cut the dividend for the second time in six months and said it will raise $6 billion in capital as the worst housing slump since the Great Depression deepens.

The first-quarter net loss was $2.19 billion, or $2.57 a share, Washington-based Fannie Mae said in a statement. Analysts were expecting a loss of 64 cents a share, the average of 12 estimates from a Bloomberg survey.

The shares rose after the company's regulator said it will loosen restrictions on Fannie Mae's capital once the company has raised the $6 billion. Fannie Mae, which owns or guarantees one of every five U.S. home loans, needs new capital to weather credit and derivative losses that rose fivefold to $8.9 billion. Moody's Investors Service affirmed the company's Aaa credit rating. The money raised will enable the company to ``emerge from this crisis'' in a stronger position, Chief Executive Officer Daniel Mudd said.

``They are now starting to realize the fact that their credit losses will be considerably higher than they were in 2007,'' said Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital, who is based in New York. ``Things in the housing and credit markets are deteriorating very fast.''

The Office of Federal Housing Enterprise Oversight said it will lower requirements for surplus capital to 15 percent from 20 percent once the money is raised, enabling Fannie Mae to buy more mortgages. The limit may be reduced to 10 percent by September if Fannie Mae continues to retain excess capital, the company said.

Ofheo Limits

Ofheo lifted limits on the size of Fannie Mae's and Freddie Mac's investment portfolios this year, ending more than two years of restrictions after an accounting scandal forced the companies to restate more than $11 billion of earnings. Ofheo Director James Lockhart said at the time the companies are needed to bolster the mortgage market.

Congress created Fannie Mae and Freddie Mac to increase mortgage financing. The companies, which own or guarantee 40 percent of the $12 trillion in U.S. home loans, profit by holding mortgage assets that yield more than their debt costs, and from fees charged to guarantee bonds they create out of loans. Increasing their ability to buy or guarantee mortgages may help prop up prices of mortgage securities and stem losses for the government chartered companies.

``As the market turns and takes its move upward and to the right, our numbers will respond in kind,'' Mudd said on a conference call with investors.

Shares Rise

Fannie Mae rose 52 cents to $28.81 at 11:28 a.m. in New York trading after falling as low as $26.24. The shares have plunged 55 percent in the past year. Freddie Mac, down 64 percent, rose 41 cents to $25.93 today.

Mudd, 49, and Freddie Mac CEO Richard Syron, 64, agreed in March to raise capital after Ofheo allowed the companies to add more assets in an effort to pump cash into the housing market.

Fannie Mae will begin a $4 billion sale of common and convertible preferred shares today, according to a statement. The dividend is being lowered to 25 cents a share from 35 cents. It had already been cut from 50 cents last year.

Capital Raisings

The government-chartered company, which sold $7 billion of preferred stock in December, may need as much as $15 billion to cope with delinquencies and foreclosures, analysts including Paul Miller of Friedman, Billings, Ramsey & Co. in Arlington, Virginia, said.

Financial firms have raised more than $234 billion as the world's biggest banks reported more than $318 billion of credit losses and asset writedowns stemming from the U.S. subprime mortgage-market collapse. McLean, Virginia-based Freddie Mac issued $6 billion in preferred shares in November.

Fannie Mae said home price declines this year are exceeding its estimates and attributed the larger share of its credit losses to loans in California, Florida, Michigan and Ohio.

Fannie Mae boosted estimates for credit losses this year to a range of 13 basis points to 17 basis points, up from a range of 11 basis points to 15 basis points. Every basis point, or 0.01 percentage point, is equivalent to 15 cents of earnings a share, according to Morgan Stanley analyst Kenneth Posner, who said he expects the losses to reach 20 basis points as the housing crisis deepens.

Fair Value

The deteriorating market conditions took a toll on Fannie Mae's balance sheet as the fair value of assets dropped to $12.2 billion last quarter from $35.8 billion in December. Shareholder equity, which measures how much money would be left to stockholders after Fannie Mae pays all its bills, dropped to less than zero for common stockholders for the first time in at least 15 years from $20.5 billion in the fourth quarter.

Credit-default swaps on Fannie Mae increased 5 basis points to 48, according to CMA Datavision. Contracts on Freddie Mac jumped 6 basis points to 49, CMA prices show. A rise indicates deterioration in the perception of credit quality.

Fannie Mae, under new standards, listed $56.1 billion in so- called Level 3 assets, a category which indicates the holdings are so illiquid that they can only be priced using the firm's own valuation models. This is the first quarter Fannie Mae has been required to disclose such assets.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: May 6, 2008 11:32 EDT