Freddie Mac portfolio shrank to two-year low

NEW YORK (Reuters) - Freddie Mac (FRE.N), the second-largest provider of money for U.S. home loans, on Thursday said its investment portfolio shrank for a third straight month in November to the lowest level in two years.

The portfolio contracted by $1.8 billion, at a 3.1 percent annualized rate, to $701.4 billion, the McLean, Virginia-based company said in an e-mailed statement. The rate of decline slowed sharply from October and September, however, as capital constraints led the company to reduce holdings.

Freddie Mac, reeling from a $2 billion third-quarter loss, raised $6 billion in fresh capital in November as a cushion for expected mortgage losses and to make room for growth in its portfolio and mortgage guaranty businesses in 2008. But the company showed few signs of growth, suggesting the portfolio that provides the lion's share of profit would fall again in December, an analyst said.

"Without fairly aggressive cash settlement purchases in the first two weeks of December, Freddie Mac's December 31 cash portfolio is very likely to fall below $700 billion," Jim Vogel, a strategist at FTN Financial in Memphis, Tennessee, said in a note to clients.

Freddie Mac and Fannie Mae, the two publicly traded government-sponsored enterprises, have found themselves caught between providing financing for home loans at a critical period and managing losses. A regulatory mandate to hold extra capital and a cap on their investments has also limited their scope.

Treasury Secretary Henry Paulson said the portfolio caps -- put in place after more than $11 billion in combined accounting errors earlier this decade -- could be raised temporarily, but only with wider reform, according to the Los Angeles Times.

Delinquencies on single-family home loans guaranteed by Freddie Mac increased to 0.54 percent in October from 0.51 percent in September and 0.42 percent at year-end 2006, the company said.

Defaults on loans that have been "credit enhanced" via programs that protect cash flows to its loans over other mortgages in a bond, or insurance, rose to 1.4 percent in October from 1.34 percent in September and 1.3 percent at the end of last year, it said.

The company has not quantified its exposure to bond insurers, a spokeswoman said.

Freddie Mac's mortgage bond business resumed double-digit growth in November, rising at a 12.3 percent annual rate to a balance of nearly $1.7 trillion, it said.

Greater MBS issuance from Freddie Mac and its larger sibling, Fannie Mae, comes as lenders steer more loans to the government-sponsored enterprises instead of "non-agency" bond programs that created billions of dollars in losses for investors.

(Reporting by Al Yoon; Editing by Dan Grebler)