Fannie Mae, the largest provider of funding for U.S. home mortgages, on Wednesday said its mortgage investment portfolio shrank in August, while delinquencies on loans it guarantees slowed significantly in the month prior.

The portfolio decreased by an annualized 4.1 percent rate to $809.1 billion in August from $812 billion the previous month, the Washington-based company said in its monthly summary.

For the year, the holdings are up 7.2 percent after shrinking 1.9 percent in 2009. In August 2009, the portfolio was $779.4 billion.

Delinquency on loans in its single-family guarantee business dropped by 0.17 percentage point to 4.82 percent in July -- the most recent data available. A year earlier it was 4.17 percent.

The multifamily delinquency rate fell 0.06 percentage point to 0.74 percent in July. A year earlier it was 0.56 percent.

Delinquencies increase stress on the company's capital, so the declines bode well for the embattled company.

The company's total mortgage portfolio decreased at a 1.8 percent annualized rate in August to $3.202 trillion.

In early September 2008, the U.S. government seized control of Fannie Mae and its smaller sibling, Freddie Mac (FMCC.OB), amid heightened worries about shrinking capital at the congressionally chartered companies.

Fannie Mae and Freddie Mac now have open credit access from the Treasury through 2012.

Under this conservatorship they have received $150 billion of U.S. capital injections. The U.S. has directed each of them to keep their portfolios below $900 billion.

The government has been relying heavily on Fannie Mae and Freddie Mac in its efforts to stimulate the battered U.S. housing market by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure.

The lowest mortgage rates in decades and high affordability helped the housing market find some footing in 2009 after a three-year slump. Recent data on home sales, however, point to a sector that has hit a lull in the absence of government support.

After the worst downturn since the Great Depression, the housing market remains highly vulnerable to setbacks.

Any improvement in the housing market would bode well for the U.S. economy, as it points to better demand in the sector where the first signs of the latest recession took root.

(Reporting by Julie Haviv; Editing by Theodore d'Afflisio)