With fewer loans to buy and more expensive debt with which to buy them, the growth of Freddie Mac's mortgage portfolio slowed dramatically in the third quarter from the pace in the first half.

Net interest income - the single biggest contributor to the agency's bottom line - fell 2.5% from the second-quarter level.

To offset the drop, the government-chartered mortgage company bought back $156 million of its common shares.

The outcome: Earnings per share rose by 14% from its level a year ago to $1.65. That still is about 2 cents lower than what Wall Street analysts typically expected. Net income rose by 12% to $312 million.

Investors who had bid up Freddie's stock by almost 20% in September apparently decided to sell, and the stock retreated to about $95.25 as of midday Wednesday, down $5.25 since Monday's close.

Freddie has been solidly predictable the last few quarters, but frequently came in with lower-than-expected earnings during the refinancing boom, when pre-paying, mortgage-backed securities ate into its interest margin.

Investors feared "it was deja vu all over again," Smith Barney analyst Thomas O'Donnell said in an interview. Irate analysts echoed that theme Tuesday in a conference call with Freddie's new chief financial officer, John Gibbons.

Mr. O'Donnell grumbled about "nasty surprises." Robert G. Hottensen of Goldman Sachs & Co. demanded to know why Freddie Mac wasn't doing better at a time when the economy is strong, the mortgage market robust, and the mortgage agencies grabbing share from competitors.

Mr. Gibbons reiterated that the agency continues to believe it can increase earnings per share at a mid-teens rate, but must be disciplined in how it does so.

Mr. O'Donnell does believe that Freddie Mac, formally the Federal Home Loan Mortgage Corp., and its larger competitor, the Federal National Mortgage Association, or Fannie Mae, have strong growth prospects for the next several years. One reason for his optimism is that both mortgage agencies announced ambitious stock buyback plans in the past year.

That's a "safety net" for times such as Freddie Mac's third quarter, when the net interest an agency earns on its mortgage portfolio is relatively low and shareholders are better off having their capital returned to them, Mr. O'Donnell said.

Mr. O'Donnell said Freddie's third-quarter earnings would have been stronger if the agency had reacted more quickly to its thin interest margin and bought back shares earlier in the quarter.

Freddie Mac's third-quarter earnings are interesting, because they shed light on the complex choices the agencies increasingly must make as their portfolios grow larger - and the ways they might be adjusting to the growing likelihood that the government will require them to hold additional capital to match their risks.

Risk-based capital standards, now being drawn up by the Office of Federal Housing Enterprise, will probably be in place sometime in 1998.

Falling interest margins at Freddie Mac - from 1.14% a year ago to 1.07% in the second quarter and 1% in the third quarter - can be traced to two events.

The bargain three-year debt that Freddie used to fund its mega-purchases in the 1993 refinance boom is running off at a high rate. Also, Freddie has added expensive long-term debt with short call periods.

The more expensive debt allows Freddie to closely match the durations of its assets and liabilities, Mr. Gibbons explained to analysts. Particularly, as the agency adjusts to risk-based-capital standards, it must calculate whether it is more profitable to capitalize its risk or sell it by, for example, buying callable debt.

Still, Mr. Gibbons appeared to shrug off the increased burdens higher capital standards could represent. He said that with profits coming in at the rate of $5 million a day, Freddie Mac has a couple of million dollars each day to build additional capital, if it needs to.

He suggested that some riskier activities, such as multifamily financing, might be affected, as Freddie Mac finds itself at a competitive disadvantage with lenders who don't have risk-based-capital standards.

Fannie Mae's interest margin of 117 basis points was more or less flat with the previous quarter and a year ago, Mr. O'Donnell said, largely because the agency used longer-term debt to fund its refinance volumes.

At Freddie Mac, revenues were $706 million in the third quarter, up 9% from the year-earlier period, but down 2% from the second quarter. Net interest income was $379 million, up 10% from a year earlier.

The portfolio grew by $5 billion during the third quarter.

Declining credit costs were a bright spot. Credit-related expenses were $150 million, down $5 million from the second quarter but up $12 million from a year ago.

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