After a difficult first half, Fannie Mae should have smooth sailing in the third and fourth quarters, according to a new report by Salomon Brothers analyst Bruce Harting.

Mr. Harting projects that Fannie Mae will earn $2.17 and $2.27 per share in the third and fourth quarters. He bases his estimates on increasing loan volumes and widening interest margins at the agency.

"Fannie Mae's growth prospects in the event of a gradual slowdown in the economy are strong, making the stock a relative outperformer in the market," he wrote. He continues to recommend purchase of the shares.

"Our third-quarter estimate includes an 8% increase in net interest income on a consecutive quarterly basis, healthy enough to cover a $20 million after-tax extraordinary loss on the prepayment of high-cost debt."

The net interest margin in the first two quarters was 115 basis points and 113 basis points respectively - lower than the average margin in recent years. But Mr. Harting notes that the margin inched up in July to 116 points, and he expects it to reach 120 to 124 basis points by the end of the year.

Loan volumes, which were anemic in the first half, should also recover as long-term bonds rally and consumers continue their shift away from adjustable-rate mortgages, he said.

Total loan purchases were $6.3 billion in the first quarter and $14.1 billion in the second quarter.

For the third quarter, Mr. Harting projects, loan purchases will reach $16.6 billion, and for the fourth quarter, $13 billion.

Mr. Harting notes that Fannie Mae had a tough time during the first half maintaining its unbroken record of increasing earnings for 30 consecutive quarters. That's because the slowdown in mortgage activity in the second half of last year and the sharp increase in interest rates led to weak interest margins and first-half earnings.

Separately, Thomas O'Donnell of Smith Barney Inc. said he had raised his 12-month price target on Fannie Mae stock to $120 from $110, citing "good operating results" in August.

Mr. O'Donnell maintained his "buy" rating on Fannie Mae's shares.

He said the rise in Fannie's net interest margin in August was small but "part of a trend."

Fannie Mae's shares rose sharply last week, reaching a new high of $106 before falling back to about $104 a share.

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