Fannie Mae's mortgage portfolio swelled in July, when the largest U.S. home funding company bought up cheap mortgage-backed debt, leaving it scant room to grow under current limits set by its regulator.

The nearly 13 percent increase put the company's holdings near caps set by the Office of Federal Housing Enterprise Oversight after an accounting scandal earlier this decade that derailed its timely financial reporting.

Shares of Fannie Mae stock slid on Friday with the company bumping up against investment curbs, which could impede profits. Fannie Mae's shares fell 2.7 percent to $66.28 on the New York Stock Exchange.

The company's mortgage holdings expanded for a third straight month in the biggest gain since a 13.8 percent jump in May, bringing growth so far this year to an annualized 1.3 percent.

The mortgage portfolio rose to $729.8 billion in July.

Using GAAP guidelines, the holdings stood at a lower $723 billion, about $4 billion beneath the cap set by the company's regulator, the Office of Federal Housing Enterprise Oversight, according to a company spokesman.

OFHEO this month rejected a request by Fannie Mae to raise its portfolio cap by about 10 percent, although it kept the door open for a possible increase. The company cited an intent to add liquidity to turbulent mortgage markets as the driver behind the request.

Freddie Mac, the second largest U.S. home funding company, is also under an OFHEO growth cap because of its own accounting scandal, but has more wiggle room to take advantage of the mortgage debt that cheapened further in August.

On Thursday, Freddie said its mortgage holdings surged by more than 14 percent in July, but still had around $17 billion of room to grow before reaching its limit.

CHEAP AND CHEAPER

As cheap as agency mortgage-backed securities have gotten in the credit and liquidity crisis this month, non-agency MBS that come without Fannie Mae or Freddie Mac guarantees were slammed even harder.

Fannie Mae said its MBS and other guarantees grew at a 15.5 percent compound annualized rate in July, due to $56 billion of its MBS issuance and a decline in liquidations.

The agency share of the mortgage business is on the rise as investors seek safer havens during the market confidence crisis.

Agency-backed MBS issuance reached $97 billion in July, more than 30 percent higher than the amount issued a year earlier, Fannie Mae said. A year ago, riskier mortgages were still in vogue and the U.S. home funding companies were losing market share.

But in July, non-agency mortgage and asset-backed securities totaled $55 billion in July, 13 percent less than a year ago and the lowest monthly amount since May 2004, according to Fannie Mae.

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