WASHINGTON - Fannie Mae and Freddie Mac said Tuesday that they would not lower the maximum size of mortgage they buy, even though a key measure of home prices declined for the second year in a row.

The announcements drew swift criticism from the thrift industry, which said the agencies are taking over too much of the mortgage market.

Congress "desperately needs" to review the situation, said Lou Nevins, president of the California League of Savings Institutions.

The issue heated up as the Federal Housing Finance Board reported that its index of home prices had fallen by 1.5% in the 12 months through October.

By law, the secondary market agencies must raise their loan limits its for the coming year if the index shows a rise in October. But the law does not address declines in the measure.

Fannie Mae - formally the Federal National Mortgage Association - and Freddie Mac, the Federal Home Loan Mortgage Corp., both said they would hold their maximum loan size at $203,150 for 1995. The agencies had stuck to that limit for this year despite a 3% drop in the index last October.

"We believe a rollback in limits its would place a burden on lenders, particularly medium and smaller-size ones," said Fannie Mae spokesman David Jeffers.

Mortgage banks, which sell most of their loans on the secondary market, have generally supported higher limits for the agencies. But thrifts, especially the larger ones, have seen higher limits as threatening the profits they earn by holding mortgages.

By holding the loan limit constant as the price index falls, thrifts argue, the agencies increase the share of all mortgages that they can buy.

"This ceiling covers a larger and larger percentage of the overall market," Mr. Nevins said.

He said he expects the index to continue its decline, as house prices continue to fall in the huge California market.

When the home price index dropped by 3% last year, the agencies maintained that they had no obligation to lower their limits. And a report this fall by the General Accounting Office supported that interpretation of the law.

But the GAO added that if housing prices fell continuously and the agencies chose to hold their loan ceilings constant, their mission to "encourage the flow of mortgage credit to low- and moderate-priced housing" would suffer. The agencies might also get too great a share of the secondary market, the report said.

If Fannie Mae and Freddie Marc were to reduce their limits in proportions to the price index's declines of the past two years, the limits would fall by about $9,000.

Thrift industry representatives say there was no question that the limits should go down.

In the 1980s, when the home-price index often posted double-digit gains, the agencies "were happy enough to accept the increases," said Brian Smith, director of policy at the Savings and Community Bankers of America.

Fannie and Freddie are supposed to provide "credit enhancement average and low-income borrowers," Mr. Smith said. They were not created to provide credit it enhancement for upper-income borrowers, he said.

Mr. Nevins, meanwhile, may get some support in his call for congressional action.

A Republican aide to the House Banking Committee predicted the issue would get congressional attention now that loan ceilings for another government program, the Federal Housing Administration, are linked to those of Fannie and Freddie.

In areas with high housing costs, the FHA may now insure mortgages at 75% of the largest loans Fannie and Freddie buy. And House Republicans want to keep strict tabs on the scope of the FHA.

For its part, the Mortgage Bankers Association of America applauded the decision by Fannie Mae and Freddie Mac not to raise the limits.

A "reduction would have caused far more harm than good," said Warren Lasko, executive vice president of the trade group.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.