UPDATE: Fannie Gross Mortgage Portfolio Shrank 19.2% In April

Fannie Mae (FNM) saw its volume of refinanced mortgages drop in April to $45.5 billion from a high of $77 billion in March, its largest since 2003, according to a monthly report released Friday.

The mortgage giant's investment portfolio shrank again, this time by 19.2%, keeping its total balance at $770.062 billion, well short of the curbs set by its regulator, according to the report from the company.

"Fannie's lack of portfolio growth was driven by the relative richness of mortgages versus agency debt," said Margaret Kerins, agency debt strategist with RBS, adding that discretionary growth will be a continuing trend for the company.

The mortgage company, which is under government conservatorship, expects to see its refinancing volumes stay at elevated levels as mortgage rates remain low, and the government widens the eligibility of refinanceable loans under its Making Home Affordable Program.

Meanwhile, the mortgage finance company said its delinquency rate rose to 3.15% in March from 2.96% in February, according to the report. This compares to a delinquency rate of 1.06% in January 2008.

The company says these numbers are elevated as a result of its moratorium on foreclosures that ended in March.

Market participants say that even though these numbers are still low compared to the averages on other kinds of mortgages, it represents an increased stress on the company from its mortgage holdings. These numbers are expected to rise as the unemployment rate continues to tick upward, and job losses drag even credit-worthy borrowers into missing payments.

On the business front, Fannie committed to buy nearly $4.9 billion of mortgage bonds in April, down from its net commitments of nearly $5.4 billion in March.

Over the past couple of months, the roles of Freddie Mac (FRE) and its sibling Fannie in the mortgage market have diminished as both the U.S. Treasury and the Federal Reserve have emerged as backstop buyers with deep pockets.

However, market participants still keep tabs on Fannie and Freddie's portfolios as an indication of their financial health, and their ability to continue to play a role as both guarantors and buyers of mortgage bonds.

Meanwhile, Fannie Mae's total book of business declined at an annualized compound rate of 2.6% in April.

Total Fannie Mae issuance of mortgage bonds increased to $56 billion in April, down from $87.8 billion in March.

Issuance of Fannie Mae securities and other guarantees decreased at a compounded annualized rate of nearly 1% during the month.

Fannie's duration gap, a measure of the portfolio's sensitivity to interest rates, averaged negative one month in April.

Freddie and Fannie are chartered by Congress to buy mortgages from lenders, freeing them to make more loans.

They repackage the mortgages as securities and sell them again. Both also hold on to large quantities of mortgage securities, profiting from the difference between the interest rates they pay and the cost of debt issued to fund their purchases.

-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071; [e-mail]