The Office of Federal Housing Oversight has issued proposed guidance that would allow for a reduction in the conforming loan limit if house prices decline by 1% or more this year.Despite a house price decline from October 2005 to October 2006 of 0.16%, OFHEO deferred an annual adjustment to the loan limit last year and allowed Fannie Mae and Freddie Mac to continue to purchase single-family loans with a principal amount of up to $417,000. Under the proposed guidance, OFHEO has served notice that a downward adjustment in the conforming loan limit could be in the cards for 2008 if a house price index maintained by the Federal Housing Finance Board declines by more than 1%, after adding in the 0.16% deferred from last year. The proposal guidance is designed to make sure things "run smoothly," an OFHEO official said, and all the mortgage industry players know what to expect. The public comment period ends July 19.

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