UPDATE 2-Freddie mortgage portfolio drops at record pace

(Adds that this largest percentage drop on record)

NEW YORK, Sept 26 (Reuters) - Freddie Mac, the second-largest provider of funding for U.S. mortgages, said on Friday its investment portfolio fell at a record rate in August as it curtailed mortgage purchases to conserve its capital.

The portfolio dropped by an annualized 56.2 percent rate, the largest percentage drop on record, according to a company spokesman. The portfolio shrank to $760.9 billion in August from $798.2 billion in July.

These retained mortgage holdings are still up by an annual rate of 8.3 percent year to date, having ended 2007 at $720.8 billion, the McLean, Virginia-based company said in a statement.

Policy-makers consider the company critical to stabilizing mortgage lending rates and it was put into government conservatorship this month due to concerns about its capital.

As home prices have tumbled at a record pace this year, few private sector lenders have been willing to provide home loans unless they could sell those mortgages to Freddie Mac or the country's leading home finance company, Fannie Mae.

However, after reporting four straight quarterly losses, Freddie Mac had said that it would be more conservative in managing its capital, including paring its purchases of loans and mortgage bonds for its portfolio.

Its purchase and sales agreements for future months fell in August, sliding by $15.4 billion after declining $324 million in July. In June, these purchase and sales agreements had jumped almost $35 billion.

The delinquencies that increased stress on the company's capital jumped to 1.11 percent of its book of business in August from 1.01 percent in July. The share of delinquent loans has surged from this year's low 0.71 percent in January and from 0.46 percent in August 2007.

With Freddie Mac and Fannie Mae under government control, each company can grow their mortgage portfolios to $850 billion to help stabilize housing and the markets, based on the takeover agreement.

"This means that Freddie Mac has the potential to grow by $89.2 billion in order to support the mortgage market, in line with its mission," RBS Greenwich analyst Margaret Kerins wrote. (Reporting by Lynn Adler; Editing by Tom Hals)