WASHINGTON -- It's November again, so the mortgage industry is engaged in a favorite guessing game: What will happen to the loan limits at Fannie Mae and Freddie Mac?
Right now, the maximum home loan that the agencies can buy is $203,500. But, as a result of declining, home prices, the limit may be lowered for 1994, some observers, say.
That would be a setback for both the agencies and their main customers, mortgage banking companies.
"It's not inconceivable that the ceiling [would] drop by $5,000 or more," said Warren Lasko, executive vice president of the Mortgage Bankers Association of America.
However, predicting the loan limits remains an inexact science, at best.
By law, the ceilings are adjusted annually -- usually upward -- to track changes in home prices.
Specifically, the average price for October, as calculated by the Federal Housing Finance Board, is compared with the average of a year earlier. The percentage change is then applied to the loan limit.
The October number won't be released until Nov. 30. But the average declined in each of the five months through September. In May, it fell more than 10% from a year earlier. By September, the dip had narrowed to 0.57%.
Concerned about an October drop, the board of governors of the Mortgage Bankers Association recently passed a resolution urging that the limit not be lowered.
The board argued that a drop would conflict with the agencies' affordable-housing goals and hinder the refinancing of some loans currently held or securitized by the agencies.
Of course, not everyone is expecting a decline. Because of the way the average is calculated, it may even be up slightly, said Dennis Jacobe, managing director of the Financial Research Institute, Washington.
No Set Policy
Another unknown is how the agencies -- formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. -- would respond to a decline in the index.
While the ceilings must be raised in response to a rise in home prices, the law does not explicitly address declines.
"First we look at the number. Then we make a decision about what we're going to do," said David Jeffers, vice president for corporate relations at Fannie Mae.
There are no "internal predictions on what the number will do," said Frank E. Nothaft, deputy chief economist at Freddie Mac. "It has so much monthly volatility."
The agencies, however, are clearly concerned.
"I think particularly Fannie Mae has chosen to keep a low profile, and let others make the argument" that if the housing price numbers fall, the loan limits should stay in place, said one source who follows the issue.
"They have done the arithmetic, and know what the possibilities are," the source said.
The October housing price price statistic has fallen only once before while this system has been in place. That was in November 1989. Fannie took the lead and lowered its loan limit for 1990 by $150. Freddie followed shortly.
"It was a minor amount. It was a one-time thing. It seemed like the right thing to do," said Mr. Jeffers of Fannie Mae.
Political Pressure Cited
According to Mr. Lasko of the Mortgage Bankers Association, Fannie Mae lowered the limit because of political pressure.
Congress was debating legislation to tighten regulation of the two companies it the time.
"Rather than appear excessively ambitious, they decided to play very cautious and lower the ceiling," Mr. Lasko said.
But "times have changed," he added. "There is no legislation pending or threatened... It would be a good time to set the precedent that they never go down. They only go up."