NEW YORK -- Fannie Mae said Friday its retained mortgage portfolio grew for the second month but is down from last year, and none of the subprime mortgage-backed bonds it holds has been cut from top-tier credit ratings.

The largest U.S. home funding company's growth in June and May comes as mortgage assets have cheapened considerably.

Mortgage securities have sharply underperformed Treasuries as risk-averse investors fear greater housing, credit and lending fallout from a crisis in the subprime mortgage sector.

However, Fannie Mae's ability to expand these holdings is being curtailed by caps set by the company's regulator, the Office of Federal Housing Enterprise Oversight, as the company works toward timely financial reporting derailed by an accounting crisis.

Fannie Mae buys mortgages and repackages them as securities for sale to investors or to hold in its portfolio.

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Fannie Mae's retained portfolio grew by an annualized 7.3 percent in June to $722.5 billion, after jumping 13.8 percent in May, the company said.

The company's retained portfolio has fallen 0.5 percent this year after shrinking 0.4 percent in 2006 to $724.4 billion.

Fannie Mae said its non-agency securities totaled $122.8 billion at the end of the second quarter, of which $47.2 billion were backed by subprime loans. Nearly all of the subprime-backed bonds, $46.9 billion, were rated 'AAA' or the equivalent by at least two ratings agencies and none of them have been downgraded, Fannie Mae said.

The subprime-backed bonds represent about 6.5 percent of the company's mortgage holdings, slightly below some Wall Street estimates.

The company's shares were off 0.4 percent at $60.35 on the New York Stock Exchange at midmorning.

On Monday, Freddie Mac, the second largest U.S. home funding company, reported a 1.2 percent portfolio gain in June to $712 billion, and said it had about $21 billion of room to expand under its growth limit agreement with OFHEO.

Freddie Mac also said it held $120.8 billion in non-agency securities backed by subprime loans at the end of May.

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