At the insistence of the Clinton Administration, which is hell-bent on boosting the nation's home ownership rate, Congress last year raised the limit on mortgages that could be insured by the Federal Housing Administration to $197,621. The idea was to help more wanna- be owners residing in high-cost hot spots qualify for government-backed financing.

But since the ceiling isn't the same for every city and town -- it ranges down to $109,032 where shelter isn't very expensive -- the new law also requires the agency to determine the median price for every county in the land as well as for entire metropolitan areas. And as a result, it now appears that the FHA lid could be lowered -- perhaps significantly -- in some markets.

The reason for this rather ironic turn of events is somewhat complicated, but let's have a go at it, shall we:

The FHA, which is not required by law to use any particular data source to measure housing prices, currently relies on a monthly survey compiled by the Federal Housing Finance Board that includes purchase prices and other related information. It is the same survey by which limits are set on the mortgages that can be purchased in the secondary mortgage market by Fannie Mae and Freddie Mac.

But because of the new law, the agency is looking for additional price data. Its stated goal is to comprehensively update all of its loan limits annually. And to do that, it says, it needs to use additional sources to broaden its data base to cover more of the housing market.

One potential source is the Office of Federal Enterprise Oversight, which is Fannie Mae and Freddie Mac's regulator. Another is data on loans insured by the agency itself, and a third would cover those guaranteed by the Department of Veterans Affairs. Neither the finance board's nor OFHEO's surveys include government-backed financing.

Anyway, at the request of Rep. John LaFalce, D-N.Y., the ranking minority member of the House Banking Committee, asked the Government Accounting Office to review how median prices were determined. Rep. LaFalce thought the FHA limited seemed awfully high in some areas, and as he suspected, they are.

GAO, the investigative arm of Congress, studied 42 markets, and found that the finance board's estimate of 1997 median home sale prices was higher in 26 markets than OFHEO's. Why the discrepancy? The finance board includes larger loan prices, and therefore larger home prices, in its survey. It's data includes loan amounts up to $500,000 and home purchase prices up to $750,000, whereas OFHEO data includes no loans greater than $240,000, the current Fannie-Freddie limit.

Because the prices of houses purchased with FHA or VA mortgages are lower, on average, than those bought with private-insured financing, the GAO says the estimated median home sales price in any given market would be anywhere from 2% to 31% lower, depending mostly on the amount of government-insured lending takes place in a given area.

According to GAO's report to Rep. LaFalce, the FHA's efforts to broaden its coverage "will be guided by a need to identify what its data sources are not capturing and a need to consider the implications for its loan limits and potential FHA borrowers of using any new data sources."

All is not lost, though, for the government also is considering obtaining data on jumbo loans which exceed the Fannie-Freddie limit and would tend to drive median prices higher, as well as other loans that have not been purchased by either Fannie Mae or Freddie Mac.

Published: May 3, 1999

Use of this article without permission is a violation of federal copyright laws.