Freddie Mac sharply shrank its holdings of mortgage securities in September and kept the portfolio below a growth limit set by its regulator, the second largest U.S. home funding company said on Wednesday.

Freddie Mac's retained mortgage portfolio dropped by an annualized 31.2 percent rate in September to $713.2 billion, after increasing for seven of the prior eight months.

The August jump of an annualized 19.3 percent had taken the portfolio up to $732.2 billion.

Freddie Mac's portfolio limit was $735 billion on an unpaid principal balance during the period that ended in September.

The big September drop in Freddie Mac's holding's pared the portfolio's growth rate this year to 1.7 percent from 6 percent in the prior month's report.

Freddie Mac reported stepped-up sales, net of other activity, in its retained portfolio that contributed to the large portfolio drop last month.

The increase in retained portfolio sales, net of other activity in September, in part reflects activities to maintain a regulatory capital surplus over the 30 percent mandatory target capital surplus, the company said in its monthly volume summary.

Freddie Mac said its total mortgage portfolio grew by annualized rates of 23.3 percent in September and 14.2 percent year-to-date.

ISSUANCE SURGES

The company's total issuance of its mortgage-related securities surged by annualized rate of 28.7 percent in September, lifting the year's growth rate to 16.9 percent.

The September issuance jump was by far the largest in any month over the past year, in which growth rates ranged between 3.2 percent in September 2006 to a peak of 16.9 percent in February.

Issuance of agency mortgage-backed securities -- those issued by Freddie Mac, Fannie Mae and Ginnie Mae -- has been running at record highs as the summer's credit crisis choked off demand for securities which bundled non-conforming loans.

Also, many major mortgage lenders are restricting business to loans they can sell to Freddie Mac and the other government-sponsored enterprises.

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