The Federal National Mortgage Association has extended this year's record growth pace, with its mortgage portfolio and mortgage-backed securities issuance reaching all-time highs in May.

Fannie Mae issued a record $19 billion of mortgage securities last month, up from a record $17.9 billion in April. And the company's net portfolio of mortgages grew $1.1 billion, to a record $138.5 billion.

The refinancing boom earlier this year continues to be the catalyst for this dramatic mortgage business growth, Fannie Mae says.

"You can't have a mortgage refinancing without a new mortgage created, and that creation finds its way to the secondary market through the mortgage-backed securities route," says Paul Paquin, senior vice president for investor relations at Fannie Mae.

Adding to Mortgage Debt

Many homeowners that have been refinancing have been taking advantage of low rates to increase the size of their mortgage loans, he adds.

"There's been a tremendous incentive on the part of consumers, when they do refinance, to take out a larger mortgage loan and pay off some of their other loans outstanding," says Mr. Paquin.

Unlike the last refinancing boom in 1986, homeowners can no longer deduct the interest on most other types of consumer loans.

But interest on mortgage debt remains tax deductible. A homeowner may boost the size of his mortgage during a refinancing, using the extra cash to purchase a car, for example, the Fannie Mae official explains.

This process has been "part of the engine that's created a lot of the mortgage debt" that's pumped Fannie Mae's mortgage business to record levels this year, he tells Dow Jones Capital Markets Report.

Peak Came in January

Applications for mortgage refinancings have steadily been on the decline since peaking in January. But Fannie Mae is confident that its mortgage portfolio and mortgage-backed securities issuance will remain strong in coming months.

"As refinancing activity starts to slow, as we're seeing, we're hoping to see the economy pick up and housing activity pick up," Fannie Mae's Mr. Paquin says. "We would expect that will happen in the second half of the year."

But that growth, he says, will be due primarily to new mortgage debt created by stepped-up home sales rather than mortgage refinancing.

Those Behind on Loans

Separately, the delinquency rates on Fannie Mae conventional single-family and multi-family mortgages fell in April.

Single-family delinquencies dropped to 0.61%, from 0.63% in March, while multi-family delinquencies slid to 2.89%, from 2.99%.

The "improvement is attributable to the small but significant improvement in the economy," Mr. Paquin says.

"That 0.61% is only slightly higher than the lowest rate of 0.5% that was reached in the second quarter of 1990 and was the lowest since about 1983. The biggest surprise is that during the recession that we've seen, it really didn't go up significantly."

Other Profit Indicators

Fannie Mae's most recent peak sing-family mortgage delinquency rate, 1.31%, was set in the first quarter of 1987.

Elsewhere, Fannie Mae's key measure of profitability slipped to 138 basis points in May, from 141 basis points. This measure represents the company's assets above debt and equity costs.

Total average net investments were $157.6 billion in May, up from $156.7 billion in April.

Fannie Mae's investment spread, the difference between the company's cost of borrowing and the return on average net investments, rose four basis points in May to 78 basis points.

The cash that flowed into Fannie Mae from its mortgage originators was held for eight days rather than the usual seven days because of the Memorial Day holiday.

The cash is parked in short-term, low-yielding investments before it is distributed to investors. Those investments effectively reduce the average yield of Fannie Mae's total investments.

A similar situation occurred In April, when there were "10 days of mortgage-backed securities float, compared with the typical month of seven days float," Fannie Mae said in a press release.

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