As lawmakers debate whether to increase the conforming loan limit to allow Fannie Mae and Freddie Mac to purchase more loans, regulators who oversee the government-sponsored entities are making plans to reduce the limit in 2009 in conjunction with falling housing prices.

The Office of Federal Housing Enterprise Oversight today said its previous plan to leave the conforming loan limit unchanged at $417,000 in 2008 stands, regardless of how steeply home prices fall this year.

But if cumulative home-price declines in 2006, 2007 and 2008 exceed 3 percent, the limit should be adjusted accordingly, OFHEO said. Previously, the regulator of Fannie and Freddie had proposed setting the threshold for a downward adjustment at a 1 percent price decline over three years.

Industry groups representing lenders, home builders and Realtors objected to that plan, arguing that OFHEO lacks the legal authority to reduce the conforming loan limit. OFHEO will accept additional comment on the new proposal for 30 days after it is publication in the Federal Register.

The conforming loan limit determines the maximum size mortgage eligible for purchase by Fannie and Freddie, and is also used to determine the lesser limits for FHA and VA loan guarantees.

The limit is tied to the average home price as reported each November by the Federal Housing Finance Board. FHFB calculated that prices fell 0.16 percent in 2006, and many experts are projecting steeper declines in 2007.

Tying any reduction of the conforming loan limit to price changes over the three years ending in 2008 could lessen the magnitude of the adjustment — or eliminate the need for it altogether — if prices rebound in 2008.

OFHEO said that if the conforming loan limit is reduced in 2009, loans considered conforming at the time of origination would still be considered conforming.

Bush administration officials have said they would consider allowing Fannie and Freddie to guarantee loans that exceed the $417,000 conforming loan limit on a temporary basis, to provide liquidity in the secondary market for jumbo loans.

A bill approved by the House in May, HR 1427, would allow Fannie and Freddie to securitize loans up to $625,000 in areas where the median home price exceeds the conforming loan limit.

But Rep. Barney Frank, D-Mass., has since said he regrets that the bill did not mandate an increase in the conforming loan limit, which would also allow the government-sponsored entities to purchase loans now considered jumbo.

Frank wants the Senate to include such a provision in its version of a similar bill overhauling oversight of Fannie and Freddie.

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