Wachovia plans $7bn refinancing after mortgage losses balloon

Wachovia, one of the biggest financial institutions in the US, warned that its mortgage customers were walking away from their houses rather than keep up onerous repayments – and it said it was tapping shareholders for an emergency $7bn (£3.5bn) refinancing to help cover the losses.

The company also became the latest to slash its dividend to preserve capital, a trend that is accelerating across the battered US banking industry.

Wachovia's news came on the same day that a smaller US mortgage lender, Fremont Capital, was forced by regulators to sell most of its business, and amid rumours on the other side of the Atlantic that UK banks will also be forced into dividend cuts and emergency rights issues to protect their balance sheets.

Ken Thompson, Wach-ovia's chief executive, said the company had topped up its provisions against mortgage losses by $2.8bn in the first three months of the year and expected to add substantially more throughout 2008 and into next year.

Two years ago, at the top of the housing market, Wachovia paid $25bn for Golden West, a mortgage lender in California. That state saw some of the most frenetic housing market speculation and, since prices have crashed, many homeowners have taken the unprecedented step of abandoning their homes to foreclosure rather than keep up payments on a mortgage worth more than the value of the house.

"The precipitous decline in housing market conditions and unprecedented changes in consumer behaviour prompted us to update our credit-reserve modelling and rely less heavily on historical trends to forecast losses," Mr Thompson said.

The $7bn rescue financing comes from selling $3.5bn of new shares at a 14 per cent discount to the prevailing share price, and a further $3.5bn of preferred stock that will pay a 7.5 per cent dividend. Cutting the dividend for existing shareholders will save a further $2bn annually. Wachovia shares tumbled more than 10 per cent on the details. "I know these actions aren't without cost," Mr Thompson said. "I wish they weren't necessary, but they are."

The Bush administration has put pressure on US banks to cut dividends and raise funds so that they can continue lending and keep the economy growing. Regulators, too, have been weighing in to protect depositors.

For example, Fremont Capital, a small California bank, was told by the Federal Deposit Insurance Corp last month that it was undercapitalised and gave it a deadline to raise cash or sell its business. Yesterday, Fremont sold its bank to Cap-italSource, which takes over 22 branches, and $5.6bn of deposits.

Meanwhile, UK investors remain jittery about the capital positions of Britain's banks, which have raised dividends and refused to boost their balance sheets despite warnings from the Bank of England. Banking shares fell in London yesterday after Bradford & Bingley was forced to deny reports that it was considering raising hundreds of millions of pounds from shareholders in a rights issue this month. B&B shares fell by up to 7 per cent but closed down just 1.1 per cent.