The Federal Reserve bought more Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds during the first six months of the year. However, Fed profits also declined on the investments.

The Fed published its first unaudited financial report Monday. It disclosed holding more than $869.5 billion in mortgage-backed securities issued by the government-sponsored enterprises as of June 30, up 2.5% from the end of last year.

Profits from these holdings dropped to $16.5 billion in the first half of the year from more than $20 billion over the same period one year ago.

The root of the smaller gains could be a combination of things, according to a source representing the interest of mortgage bond investors, including an expanded Home Affordable Refinance Program.

Banks began implementing new rules under HARP in March to allow more underwater GSE mortgage borrowers to refinance into a lower rate. More than 422,000 loans have been refinanced and prepayed out of the bonds through June, already more than the 400,000 in all of last year.

Profits off the Fed holdings dropped to $8.1 billion in second quarter from $10 billion in the first three months of the year.

The portfolio will continue to grow as well. The Fed announced in June it would continue its Operation Twist to use proceeds from these MBS holdings to buy more through the end of 2012.

Laurie Goodman, chief analyst at Amherst Securities, said the lower profits are also the result of the Fed moving more of its bond portfolio to lower coupon stacks, meaning it is taking lower interest payments on the securities it holds.

Prepayment speeds also contributed, she said.

"Aggregate prepayment speeds are up," Goodman said. "This reflects the success of HARP 2.0."