UPDATE 2-Freddie Mac mortgage portfolio increased in October

(Adds mortgage bond business, analyst comment)

By Al Yoon

NEW YORK, Nov 24 (Reuters) - Freddie Mac (FRE.P), the second-largest provider of U.S. home loan funding, said on Monday it boosted its investments in October at the fastest annual rate since May.

The portfolio rose at a 43.6 percent annual rate, by $26.8 billion, to $763.7 billion, the company said in a statement. Agreements to buy mortgages in future months increased to $17.4 billion from $2.5 billion.

October was the first full month that Freddie Mac and its larger sibling, Fannie Mae, were under government control.

In signs of mounting challenges elsewhere, its mortgage bond business shrank for the first time in four years and delinquencies jumped to their highest this decade. Some of the portfolio growth likely came as Freddie Mac bought bad loans out of its mortgage securities, Jim Vogel, an interest-rate strategist at FTN Financial Capital Markets, said in a note.

The faster portfolio growth came during the first full month after the government forced Freddie Mac and rival Fannie Mae into conservatorship to backstop their eroding capital. The companies were given the ability to expand investments to $850 billion each by the end of next year, assured that government capital would help offset mortgage losses.

The government sees portfolio purchases as key for economic stabilization, since the two companies are filling voids left by crippled Wall Street banks and own or guarantee nearly half of all U.S. mortgages.

"Freddie accelerated around corners last month to rebuild its balance sheet in a major catch-up move," said Vogel. He noted that growth while maintaining sufficient hedges in a rough market was a "minor positive" for the mortgage market.

Mortgage-backed securities issued by Freddie Mac and Fannie Mae, which make up the bulk of purchases, have continued to founder as the credit crisis saps appetite for risk and funds sell bonds purchased with borrowed money. Direct purchases of MBS by the U.S. Treasury have only slowed the market's deterioration.

Rising yields on MBS relative to government debt have prevented consumer mortgage rates from falling as quickly as rates on Treasury securities.

Freddie Mac's business of pooling and guaranteeing mortgages for sale to investors suffered in October, with issuance failing to keep pace with MBS whose loans have been paid down. The company issued $13.8 billion in mortgage bonds, down from $22 billion in September and only a third of the levels of mid-2008.

With $11.4 billion in fixed-rate MBS issued so far in November, Freddie Mac is losing market share to Fannie Mae and Ginnie Mae, which have issued $28 billion and $25.5 billion, respectively, this month, according to eMBS, a data company.

Delinquencies on loans guaranteed by Freddie Mac accelerated in October, rising to 1.34 percent from 1.22 percent in September. (Additional reporting by Lynn Adler; Editing by Dan Grebler)