May 23 (Bloomberg) -- Freddie Mac, the mortgage finance company that overtook Fannie Mae this year to become the largest provider of funds for U.S. home loans based on portfolio size, said its mortgage assets fell back behind its rival last month.

Freddie Mac's portfolio contracted $5.2 billion in April to $709.2 billion, while Fannie Mae's holdings fell $2.2 billion to $710.6 billion, the companies said in releases today. In March, Freddie Mac's assets surpassed Fannie Mae's for the first time, rising to $714.5 billion, or $1.7 billion more than its rival.

Yield premiums over benchmarks on mortgage bonds created by other companies have been declining since mid-April, according to Credit Suisse Group. A ``supply bulge'' of the fixed-rate securities guaranteed by Fannie Mae, Freddie Mac or government agency Ginnie Mae hasn't yet boosted holdings at the companies, Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients today.

The government-chartered companies in February and March had taken advantage of higher yield premiums on so-called non- agency bonds, according to Vogel, each adding $6 billion of the securities backed by loans riskier than they'd typically buy or guarantee themselves. Last month, Fannie Mae's holdings of the bonds declined by $361 million; Freddie Mac's rose $793 million.

McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae were created by Congress to expand home ownership by increasing the financing available to borrowers. They make money by holding mortgage assets as investments and from fees for guaranteeing mortgage-backed securities owned by others.

The decline at an annual rate of 3.7 percent in Fannie Mae's portfolio in April followed the first month of growth since December. The contraction at an 8.8 percent annual rate in Freddie Mac's holdings was the first monthly drop of the year.

Book of Business

The companies' business of guaranteeing mortgage bond continued surging. Fannie Mae's total ``book of business,'' or the total mortgage assets it either guarantees or owns, rose at an 8.1 percent rate last month to $2.6 trillion, compared with 8.4 percent growth last year; Freddie Mac's total rose at a 10.8 percent rate to $1.9 trillion, up from 7.7 percent in 2006.

``The market's coming back to where we have been,'' Thomas Lund, the senior vice president for Fannie Mae's single-family mortgage business, said in an interview at conference in New York this week, talking about non-agency bond creators becoming more cautious about the loans they'll take amid rising late payments and foreclosures. The U.S. residential mortgage market is about $10.9 trillion, according to the Federal Reserve.

Fannie Mae shares rose $2.20 to $65.63 today in New York Stock Exchange composite trading. Freddie Mac rose 21 cents to $67.89. Both are trading at or near 52-week highs.

Subprime Mortgages

``Liquidity in the secondary market'' for subprime mortgages, or home loans given to borrowers with poor credit or high debt, is coming back, Countrywide Financial Corp. Chief Operating Officer David Sambol said at a company hosted fixed- income investor meeting today in New York.

``While the subprime market experienced significant turmoil in the first quarter, from our perspective the shakeout and the resulting rationalization that occurred in the subprime market was overdue,'' Sambol said. Calabasas, California-based Countrywide Financial is the largest mortgage lender in the U.S.

Portfolio Constraints

Fannie Mae, originally the Federal National Mortgage Association, was created in 1938 as part of President Franklin D. Roosevelt's New Deal plan. With the Vietnam War pressuring the federal budget, Fannie Mae was split from the government in 1968, and shares in the company were sold to the public.

Freddie Mac, formally called the Federal Home Loan and Mortgage Corp., was created in 1970 to provide competition for Fannie Mae. The company issued its first mortgage bonds in 1971, a decade before its rival. The earlier securitization focus meant Freddie Mac's portfolio has always been smaller. In 1985, it was $13.5 billion, compared with Fannie Mae's $94.1 billion.

The companies' portfolios have been constrained by agreements with their regulator, following $11.3 billion in accounting errors dating back to 2001.

Under a July agreement with the Office of Federal Housing Enterprise Oversight, Freddie Mac promised to limit increases in its portfolio under generally accepted accounting principles to no more than 2 percent annually over the June 30 level of $710 billion. As of April 30, that total was $708.1 billion.

Under an earlier agreement last year with the regulator, Fannie Mae limits its portfolio to its Dec. 31, 2005, level under GAAP of $727 billion. On April 30, that portfolio balance was about $710 billion.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: May 23, 2007 17:19 EDT