Let the speculation begin!

In an annual ritual that tends to start when the Federal Housing Finance Board issues its monthly mortgage market survey for September, it's time to guess next year's conforming loan limit.

The maximum, currently $333,700, is one of the most closely watched numbers in the mortgage and financial markets because it's the ceiling on the loans that can be purchased or securitized by Fannie Mae and Freddie Mac, the two government chartered financial institutions which provide liquidity to the U.S. mortgage market.

Loans at or below the so-called "conforming loan" limit (conforming because they adhere to Fannie and Freddie's guidelines) are anywhere from 0.25 to 0.75 percent less expensive than loans above because of several reasons, not the least of which is the perception on the part of investors in mortgages worldwide that Uncle Sam will step in should Fannie or Freddie falter. The ceiling is adjusted every year based on the average price of housing as calculated by the housing finance board from one October to the next.

The October 2004 figure won't be announced until Nov. 30, the housing finance board said late last month. That's several days later than usual.

But if the 11.3 percent increase in the average house price from September 2003 to September 2004 is any gauge, the ceiling will rise to $371,400 as of Jan. 1, 2005.

Of course, it's pure conjecture whether the October-to-October increase will be that large or even larger -- or whether there will be any increase at all. After all, the FHFB average has been on a roller coaster ride practically all year, rising in one month, dipping the next, rising again the following month and falling once more after that.

Actually, one thing is certain: Whatever the percentage increase, the dollar amount will be adjusted downward by $2,300 by the Office of Federal Housing Enterprise Oversight, the GSE's safety and soundness regulator.

That's the amount Fannie Mae and Freddie Mac neglected to incorporate into their annual calculation last year. And because of the error, OFHEO will be doing the math from now on, not the GSEs.

"It is now clear that the informal procedure currently used for annually adjusting the conforming loan limit is inadequate and a new, formal supervisory process is warranted," OFHEO Director Armando Falcon said last February.

Specifically, the GSEs determined that the 2004 ceiling would increase by 3.41 percent based on an unadjusted national average. Had they followed the FHFB staff's notice to reduce the October 2003 figure by $1,647, the change in prices would have been only 2.71 percent.

It wasn't the first time Fannie and Freddie's failed to make the proper loan limit adjustment, either.

On three occasions -- 1990, 1994 and 1995 -- the average house price declined from the previous October, yet the GSEs didn't lower their limit.

In three other years -- 1992, 1998 and 2003 -- they did not take methodology changes in the survey into account. And in 1997, they took yet another course, setting a lower number than called for by the adjustment.

Thus, in seven of the 23 years in which the enterprises were responsible for calculating the all-important loan limit, they failed to make the proper adjustments. And that rather abysmal batting average, Falcon said earlier this year, necessitates "a more regularized process."

Average Purchase Price New and Existing Homes:

Published: November 3, 2004

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.