WASHINGTON - In a controversial decision, Freddie Mac said Tuesday it would not reduce the maximium size of home loans it buys, even though the benchmark traditionally used to set the ceiling declined by 3%.

Fannie Mae, the other major player in the secondary market for mortgages, is expected to follow suit.

The plans immediately drew fire from some observers and thrift industry officials.

By maintaining the ceiling at $203,150 in a market with falling prices, the mortgage agencies would have a larger pool of potential loans to buy. Some thrifts complain that the agencies already ready control too much of the market, crowding out private lenders that hold loans.

The issue came to a head when the Federal Housing Finance Board announced Tuesday that the average home price fell almost 3% in the year through October. to $144,000

Price Declines

By law, changes in the Fannie and Freddie loan limit have been keyed to October changes in the home-price measure. But some lawyers, and apparently the agencies themlseves, have concluded that the law addresses only increases in home prices, not declines.

The October measure has declined only increases in home prices, not declines.

The October measure has declined only once before, in 1989, and a small, $150 cut in the limit was made in 1990.

If the agencies followed the price decline this time, the loan limit would fall more than $6,000. While that amount would not dramatically affect competition in the mortgage market, the failure to lower the ceiling would set a precedent worrisome to some private lenders.

"I think the spirit of the law make clear that the ceiling ought to go down when the index goes down," said Lou Nevins, president of the California League of Savings Institutions. "The index has been very good to the agencies over the years. I think they ought to observe [it]."

"The reason there's a loan limit [is that] it's generally understood that above the limit, the private sector can serve the market," added Dennis Jacobe, managing director of the Financial Research Institute in Washington.

Fannie Bound to Follow

Freddie Mac, formally the Federal Home Loan Mortgage Corp., took the lead Tuesday by announcing that it would stick to its current loan limit.

Arch rival Fannie Mae - the Federal National Mortgage Association - is bound to follow, said Warren Lasko, executive vice president of the Mortgage Bankers Association of America. "For market and political reasons, Fannie Mae would want to do the same," thing said.

Fannie Mae is "leaning toward" holding the current loan limit, said spokesman David Jeffers. However, he said, the agency plans to study, the issue for several weeks.

Market Share Would Shrink

If the agencies lowered the loan limit in line with the home price measure, their share of the mortgage market would shrink by about 3%, estimated analyst Jonathan Gray of Sanford Bernstein.

He said this shrinkage would amount to $20 billion to $30 billion of loans.

A lower limit would cause some logistical problems and "cut out a segment of business that we would like to do." commented Mark Faris, executive vice president at Norwest Mortgage Corp., Des Moines.

Though private conduits would step in to buy loans above the adjusted agency limits, some business might be lot, Mr. Faris said.

Critics added that a decision not to cut the limit would have practical consequences in subsequent years. "Suppose the index increases next year. Do you not increase the limit or do you increase from the current limit?" Mr. Jacobe wondered.

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