Citing competitive concerns, Fannie Mae said Friday that it would follow Freddie Mac in raising its 1996 home-loan limit to $207,000.
The decision ends an unprecedented split between the two government- sponsored mortgage agencies over the size of the largest individual loans they will buy this year.
The problem erupted in late November, when the agencies usually reset their loan limits in sync with shifts in a key housing index.
Fannie Mae surprised observers by keeping its limit at $203,150 after Freddie Mac raised its ceiling by 1.9%, to $207,000, in line with the index's gain.
Lenders, who had complained that the gap would disrupt their operations, said Friday that they were relieved that Fannie Mae had relented.
"We are basically in a commodity business which dictates you've got to have efficiencies, and this allows us to get back to that," said Paul S. Reid, president of American Home Funding Inc., Richmond, Va., and chairman of the Mortgage Bankers Association of America.
Fannie Mae chairman James A. Johnson disclosed the switch in a letter Thursday to House Banking Committee Chairman Jim Leach, R.-Iowa.
"We have reluctantly concluded that a two-tier system is not viable," Mr. Johnson wrote.
Mr. Johnson said lenders had told Fannie Mae - formally the Federal National Mortgage Association - that they would have to take expensive steps to accommodate dual loan limits.
Lenders said they would have to shift much of their business to Freddie Mac - the Federal Home Loan Mortgage Corp. - unless Fannie Mae offered better prices and other concessions, Mr. Johnson wrote.
"We hope you understand that Fannie Mae had to adjust to avoid being penalized further," he told Rep. Leach.
The loan-limit controversy arose because an ambiguously worded law allows the mortgage agencies to raise their loan limits in tandem with the Federal Housing Finance Board's home-price index - but makes no mention of what they should do when the index falls.
In 1993 and 1994, when the index did indeed fall, neither agency decreased its limits. Thrift lobbyists protested, asserting that the agencies were unfairly creeping into the upper end of the market and grabbing market share. However, a government study supported Fannie Mae and Freddie Mac decisions.
When the 1995 index was released, Freddie Mac decided to go ahead and raise its limits. But Fannie Mae said it wanted to respect the integrity of the index and would not increase its loan limit until it had made up the decreases.
Mr. Reid said he was not surprised that Fannie Mae ultimately chose to match Freddie. He said it was inevitable that Fannie Mae's sales representatives would "get an earful on the burdensome nature of this and apply whatever pressure they could on management."
Charles Rinehart, chief executive of the nation's largest thrift, Home Savings of America, Irwindale, Calif., offered a sharply different interpretation. He said Fannie Mae's decision shows that "the index is being manipulated."
"They might as well just make them (the limits) up as they go along," Mr. Rinehart said. "It fits in with my general sense that the agencies own Capitol Hill."
