WASHINGTON -- The mortgage industry may be shrinking, but profits at the secondary-market agencies keep climbing.

The Federal Home Loan Mortgage Corp. released results Monday showing that the second quarter - a bloodbath for many lenders that sell loans into the secondary market - was the best in its 24-year history.

Profits of the Federal National Mortgage Association, announced last week, were similarly upbeat.

The industry's contraction "is for originators," said Ellen Goldberg, vice president for investor relations at Fannie Mae. Fannie and Freddie are "much more concerned with net new growth" in loans made now that the refinance boom has died.

Last year, when $1 trillion in home loans were made, only 52%, or $486 billion, were written because a home was being purchased rather than refinanced, Ms. Goldberg said. This year, that number is expected to be $540 billion of a total of $700 billion of mortgages made.

The key to the agencies' strategy is growing their portfolios. With mortgage prices soft in the secondary market, Fannie and Freddie are looking to go after the bargains in the industry.

Fannie Mae expects its mortgage portfolio to grow by 15% this year, and Freddie Mac has said it will expand its portfolio by a third.

For Fannie, which has the larger portfolio, the fruits of that strategy were evident in the second quarter.

Interest income on the agency's investment portfolio, which consists mostly of mortgages, was $720.1 million, up from $632. 1 million a year earlier.

Income was up despite tighter margins between the debt used to finance the portfolio and the yield on the investments. Fannie Mac made up for the tighter margins by increasing its mortgage holdings by about a fifth.

Freddie Mac also built its mortgage portfolio substantially, but its interest income fell as spreads tightened by 59 basis points this quarter compared with the period a year earlier. The dramatic drop in spread came as the agency moved more heavily toward more-expensive long-term debt.

Analyst Gareth Plank of Mabon Securities in San Francisco said Freddie Mac's heavy reliance on short-term debt until now has made it extremely vulnerable as it shifts to a long-term debt strategy in a rising rate market.

A Freddie Mac official, who spoke on condition of anonymity, said the agency was in a transitional phase. Spreads will stabilize as assets and liabilities become more matched, the official said.

Looking ahead, however, analysts worry that the rising cost of callable debt will constrain both agencies as they try to fatten their portfolios.

"There is very little room for error given rising rates, declining volumes, and tightening spreads," said analyst Bruce Harting of Salomon Brothers.

Before the recent rate increases, agencies were able to issue debt just 25 to 30 basis points above Treasury rates, Mr. Harting said. Now that spread has increased to as much as 50 basis points, he said.

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