FHA Loan Limits: Finance Board Data Are a Reasonable Source of Home Sales
Prices (Letter Report, 03/29/99, GAO/RCED-99-78).

Pursuant to a congressional request, GAO provided information on housing
prices from sources other than the Federal Housing Finance Board,
focusing on: (1) comparing data on house prices from the Finance Board
with data the Department of Housing and Urban Development's Office of
Federal Housing Enterprise Oversight (OFHEO) collects to measure house
price changes; (2) views of officials of the agencies involved on the
results of this analysis; (3) the effect on median prices of
supplementing the Finance Board's and OFHEO's data with information each
does not already include on lower-priced homes with government-insured
mortgages; and (4) the Federal Housing Administration's (FHA) recent
efforts to explore alternative sources of data for measuring median home
prices.

GAO noted that: (1) the Finance Board and OFHEO's estimates of 1997
median home sales prices were similar in about two-thirds of the
metropolitan areas GAO reviewed; (2) in 27 of the 42 areas, the two
agencies' estimates were within 5 percent of each other; (3) loan limits
based on either set of data would be similar in these areas; (4) for the
remaining 15 areas GAO reviewed, the Finance Board estimated a higher
median home sales price in 10 of the areas, while OFHEO's estimate was
higher in 5 areas; (5) officials familiar with these data cited the low
number of substantive differences in GAO's analysis as an indicator of
the validity of the Finance Board's data; (6) because no substantive
difference existed between the two sets of data in about two-thirds of
the areas GAO reviewed, the officials indicated the Finance Board's data
are a reasonable measure of an area's median sales price for homes
without government-insured financing; (7) in those areas for which
substantive differences did exist, officials from the different agencies
involved agreed the reason was that the Finance Board includes larger
loans, and thus higher home purchase prices, in its survey than does
OFHEO; (8) the Finance Board's 1997 data include loan amounts up to
$500,000 and house purchase prices up to $750,000; (9) OFHEO's data for
1997 included no loans greater than $214,600; (10) these officials also
cited normal variations associated with surveys and statistical sampling
as a reason for some differences between the two sets of data; (11)
supplementing the data from either the Finance Board or the OFHEO with
data on homes financed with government-insured loans would lower the
estimated median home sales price in any given area by 2 to 31 percent;
(12) the purchase prices of homes financed with mortgages insured by FHA
and the Department of Veterans Affairs are, on average, lower than those
of homes bought with privately insured financing; (13) these lower
prices result from the limits on the size of individual loans FHA may
insure and because government-insured financing tends to be focused on
first-time homebuyers; (14) FHA is engaged in an effort to use
additional sources of data; (15) FHA relies heavily on the Finance
Board's survey for the data it needs to set its loan limits, but to a
limited extent it has also supplemented that survey with data its field
offices gather on local home sales prices; and (16) FHA is considering
using data on loans that neither the Federal National Mortgage
Association nor the Federal Home Loan Mortgage Corporation has
purchased.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-78
     TITLE:  FHA Loan Limits: Finance Board Data Are a Reasonable Source 
             of Home Sales Prices
      DATE:  03/29/99
   SUBJECT:  Comparative analysis
             Mortgage loans
             Government guaranteed loans
             Cost analysis
             Lending institutions
             Government sponsored enterprises
             Data integrity
             Real estate sales
             Fair market value

             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Banking and
Financial Services, House of Representatives

March 1999

FHA LOAN LIMITS - FINANCE BOARD
DATA ARE A REASONABLE SOURCE OF
HOME SALES PRICES

GAO/RCED-99-78

FHA Loan Limits

(385768)


Abbreviations
=============================================================== ABBREV

  CMSA - consolidated metropolitan statistical area
  FHA - Federal Housing Administration
  HUD - Department of Housing and Urban Development
  MSA - metropolitan statistical area
  OFHEO - Office of Federal Housing Enterprise Oversight

Letter
=============================================================== LETTER


B-281434

March 29, 1999

The Honorable John J.  LaFalce
Ranking Minority Member
Committee on Banking
 and Financial Services
House of Representatives

Dear Mr.  LaFalce: 

Purchasing a home is one of the most significant financial
undertakings for most families.  For many of those seeking to do so
for the first time, the Department of Housing and Urban Development's
(HUD) Federal Housing Administration (FHA) often helps make home
ownership possible.  FHA does this by insuring mortgages so that
lenders will make loans to borrowers who might be unable to otherwise
get a mortgage.  FHA also sets limits on the dollar value of
individual loans it will insure.  The maximum FHA-insured mortgage a
borrower may obtain varies throughout the country depending on local
housing prices, resulting in hundreds of different loan limits.  To
measure local house prices and determine these loan limits, FHA
largely relies on data from a Federal Housing Finance Board (Finance
Board) survey that collects house purchase prices and other related
data on non-government-insured mortgages from mortgage lenders. 

Because the FHA loan limits for some areas seemed high, you asked us
to collect and analyze data about house prices from sources other
than the Finance Board.  This report (1) compares data on house
prices from the Finance Board with data HUD's Office of Federal
Housing Enterprise Oversight collects to measure house price
changes;\1 (2) presents the views of officials of the agencies
involved on the results of this analysis; (3) analyzes the effect on
median prices of supplementing the Finance Board's and the Office of
Federal Housing Enterprise Oversight's data with information each
does not already include on lower-priced homes with
government-insured mortgages; and (4) provides information on FHA's
recent efforts to explore alternative sources of data for measuring
median home prices.  The data we analyzed cover 42 selected
metropolitan areas for which the Finance Board publicly reports data
annually (see app.  I for a list of these areas). 


--------------------
\1 Neither of these sources collects information on purchase prices
for all home loans or all home sales.  The Federal Housing Finance
Board collects home price data for mortgages that are not insured by
the federal government and that are not for the purpose of
refinancing an existing loan.  The Office of Federal Housing
Enterprise Oversight collects data on loans--few of which are
government-insured and none of which may exceed a statutory
limit--purchased by the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). 
While the Finance Board publishes data on house prices as well as
price changes, the Office of Federal Housing Enterprise Oversight
publishes only data on house price changes, not the house price data
it provided us for the analysis in this report.  Both Fannie Mae and
Freddie Mac consider these data on house prices proprietary and
confidential. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Finance Board and the Office of Federal Housing Enterprise
Oversight's estimates of 1997 median home sales prices were similar
in about two-thirds of the metropolitan areas we reviewed.  That is,
in 27 of the 42 areas, the two agencies' estimates were within 5
percent of each other.  Therefore, loan limits based on either set of
data would be similar in these areas.  For the remaining 15 areas we
reviewed, the Finance Board estimated a higher median home sales
price in 10 of the areas, while the Office of Federal Housing
Enterprise Oversight's estimate was higher in 5 areas. 

Officials familiar with these data, including officials from the
Finance Board as well as the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac), cited the low number of substantive differences in our analysis
as an indicator of the validity of the Finance Board's data.  Because
no substantive difference existed between the two sets of data in
about two-thirds of the areas we reviewed, the officials indicated
the Finance Board's data are a reasonable measure of an area's median
sales price for homes without government-insured financing.  In those
areas for which substantive differences did exist, officials from the
different agencies involved agreed the reason was that the Finance
Board includes larger loans, and thus higher home purchase prices, in
its survey than does the Office of Federal Housing Enterprise
Oversight.  The Finance Board's 1997 data include loan amounts up to
$500,000 and house purchase prices up to $750,000.  The Office of
Federal Housing Enterprise Oversight's data for 1997 include no loans
greater than $214,600.  These officials also cited normal variations
associated with surveys and statistical sampling as a reason for some
differences between the two sets of data. 

Supplementing the data from either the Finance Board or the Office of
Federal Housing Enterprise Oversight with data on homes financed with
government-insured loans would lower the estimated median home sales
price in any given area by 2 to 31 percent.  This is true because
neither the Finance Board's nor the Office of Federal Housing
Enterprise Oversight's data include homes financed with
government-insured loans.  The purchase prices of homes financed with
mortgages insured by FHA and the Department of Veterans Affairs\2
are, on average, lower than those of homes bought with privately
insured financing.  These lower prices result from the limits on the
size of individual loans FHA may insure and because
government-insured financing tends to be focused on first-time
homebuyers, who typically purchase less expensive homes. 

FHA is engaged in an effort to use additional sources of data, such
as the Office of Federal Housing Enterprise Oversight, to improve its
measurement of median home sales prices.  In part, this is due to
recent legislative changes that make it necessary for FHA to know the
median price for each county within a metropolitan area as well as
for the entire area when setting loan limits.\3 Currently, FHA relies
heavily on the Finance Board's survey for the data it needs to set
its loan limits, but to a limited extent it has also supplemented
that survey with data its field offices gather on local home sales
prices.  In addition to exploring the use of the Office of Federal
Housing Enterprise Oversight's data, FHA is considering using data on
loans that neither Fannie Mae nor Freddie Mac has purchased. 


--------------------
\2 Although the Department of Veterans Affairs guarantees mortgages
for U.S.  veterans and their families rather than insuring them, this
report refers to these loans as government-insured. 

\3 P.L.  105-276 sec.  228(b) mandates that the highest loan limit of
any county within a metropolitan statistical area must apply to loans
insured in all the counties in that area. 


   BACKGROUND
------------------------------------------------------------ Letter :2

One of FHA's primary goals is to assist those households that are
unable to meet the requirements of the private market for mortgages
and mortgage insurance or that live in underserved areas where
mortgages may be harder to obtain.  In doing so, FHA applies more
flexible underwriting standards than the private market generally
allows.  Borrowers seeking FHA-insured loans may make smaller down
payments (as a percentage of the purchase price) than the private
market requires and may also include in the amount they borrow most
costs associated with closing the loan, rather than using cash for
those expenses, as private lenders generally require.  FHA is
required by statute to set limits on the dollar amount of individual
loans it will insure.  These limits are based, in part, on local
median home prices. 

The Finance Board surveys major mortgage lenders each month,
collecting information on the terms and conditions (including the
sales prices of homes) of conventional single-family home loans
closed during the last 5 business days of the month.\4 The Finance
Board may not require that lenders participate in its survey.  Those
doing so participate voluntarily.  Fannie Mae and Freddie Mac, both
government-sponsored enterprises, are parts of the secondary mortgage
market, through which many single-family home mortgages are
ultimately sold.\5 Federal law requires that Fannie Mae and Freddie
Mac use information from the Finance Board's survey on the
year-to-year change in house prices to annually adjust the conforming
loan limit (currently $240,000), which is a legislative restriction
on the size of any individual loan that either may buy.\6

FHA also uses information from the Finance Board to set limits on the
dollar value of loans it will insure, which are based on the
conforming loan limit and median home prices.  That is, FHA sets an
area's loan limit at the greater of 48 percent of the conforming loan
limit or 95 percent of the median home sales price for the area, but
no greater than 87 percent of the conforming loan limit.\7
Consequently, FHA loan limits vary depending on the location of the
home and the median home sales price there but are no lower than
$115,200 and no higher than $208,800--48 percent and 87 percent,
respectively, of the conforming loan limit. 

FHA is not required by statute to use a particular source of
information on home prices to determine the median price of homes in
an area and, consequently, the loan limit for the area.  However, FHA
has chosen to use the Finance Board survey for this purpose.  FHA
relies heavily on the survey to measure median home sales prices
because it is the most comprehensive source of published house price
data readily available to the agency. 

The Office of Federal Housing Enterprise Oversight (OFHEO) also
collects information on home sales.  Specifically, both Fannie Mae
and Freddie Mac provide data to OFHEO on all of the mortgages they
purchase in order for OFHEO to construct a house price index.\8 OFHEO
uses the house price index to account for changes in the values of
the homes securing the mortgages that the enterprises have purchased
and their potential impact on credit risk.  By definition, the index
includes only conforming loans--those with values less than the
conforming loan limit--because neither enterprise may purchase loans
that exceed the conforming loan limit.  In addition, the index
excludes all government-insured loans.\9 In 1997, Fannie Mae and
Freddie Mac purchased 37 percent of all conventional loans originated
that year for single-family homes. 


--------------------
\4 Conventional loans are all home loans not insured or guaranteed by
the government.  The survey also excludes refinancings. 

\5 The Congress created the enterprises to enhance the availability
of credit to qualified borrowers by purchasing mortgages from
lenders, who can then use the proceeds from those sales to make
additional mortgage loans. 

\6 12 U.S.C.  1717(b)(2) and 12 U.S.C.  1454(a)(2).  Loans greater
than the conforming loan limit are called jumbo loans. 

\7 Alaska, Hawaii, Guam, and the Virgin Islands may have even higher
loan limits because the Congress has designated these states and
territories as special high-cost areas, allowing FHA to set its loan
limits there up to 50 percent higher than the limits applicable
elsewhere.  Also, FHA permits its field offices to use non-Finance
Board data to adjust loan limits.  Any interested party who does not
believe that the FHA loan limit for a given area accurately reflects
the median house prices there may appeal for an increase.  Anyone
doing so must submit to FHA sufficient house sales price data to
justify granting an increase. 

\8 The house price index measures changes in home values over time,
using the home's appraised value from a refinancing and either the
home's appraised value or sales price from purchases.  OFHEO
estimates a value for each home with a repeat transaction and
compares that to the home's previous sales price or appraised value,
with any difference between the two becoming the basis for the index. 
Although OFHEO publishes the index, it does not publish the data that
Fannie Mae and Freddie Mac provide it that form the basis for the
index.  Fannie Mae and Freddie Mac consider those data to be
proprietary and confidential. 

\9 Fannie Mae and Freddie Mac can and do purchase government-insured
loans, but they buy very few, and OFHEO screens these out of its
house price index as well as the data it provided us.  The Government
National Mortgage Association (Ginnie Mae) securitizes nearly all
government-insured mortgages, guaranteeing the timely payment of
principal and interest on privately issued securities that are backed
by pools of government-insured mortgages. 


   THE FINANCE BOARD AND THE
   OFFICE OF FEDERAL HOUSING
   ENTERPRISE OVERSIGHT USUALLY
   ESTIMATE SIMILAR MEDIAN PRICES
------------------------------------------------------------ Letter :3

In about two-thirds of the 42 metropolitan areas we reviewed, no
substantive difference existed in the 1997 median house prices
calculated with Finance Board and OFHEO data.  As figure 1 shows, in
27 of these areas, the difference between the higher and lower
estimates of median prices according to the two sets of data was 5
percent or less.  In an additional 10 areas, the two agencies'
estimates were within 10 percent of each other.  For the 15 areas
where the two estimates differed by more than 5 percent, the Finance
Board estimated a higher median home sales price than OFHEO in 10
areas, while OFHEO estimated a higher median in 5 areas. 

   Figure 1:  Degree of Difference
   Between 1997 Median House
   Prices in 42 Metropolitan Areas
   Using the Finance Board's and
   OFHEO's Data

   (See figure in printed
   edition.)

Sources:  GAO's analysis based on median house price data from the
Federal Housing Finance Board and the Office of Federal Housing
Enterprise Oversight. 

Because one basis for measuring the median price--the Finance Board's
data--does not result in a substantively different price than
another--OFHEO's data--for about two-thirds of the areas we reviewed,
FHA loan limits in those areas would be similar using either source
of data.  The median price determines whether FHA sets its loan limit
at a percentage of the conforming limit or at 95 percent of the
median home price. 


   OFFICIALS SEE DATA SOURCES AS
   MUTUALLY SUPPORTIVE, WITH
   DIFFERENCES LARGELY DUE TO
   JUMBO LOANS
------------------------------------------------------------ Letter :4

The Finance Board's data were a reasonable measure of an area's
median home sales price (for homes with conventional financing),
according to officials at the Finance Board, Fannie Mae, and Freddie
Mac.  As support for this position, they cited the similarity in the
median prices that the Finance Board and OFHEO calculated in about
two-thirds of the areas we reviewed.  Given the differences in the
nature of the data the Finance Board collects through a survey of
lenders versus OFHEO's data, which represent all the conforming loans
Fannie Mae and Freddie Mac purchased, these officials stated that
they viewed each data set as supportive of the other.  Regardless of
the similarities and differences in the median home prices derived
from these two sources, the different methods by which the Finance
Board and OFHEO collect home price data could explain some variation
between them.  For example, while the Finance Board survey is
intended to estimate house prices at the national level, estimates at
the local level are likely to be less representative of all
non-government-insured home sales for that area.  These officials
added that there would be even fewer differences between the two if
we analyzed trends in median price data over a number of years. 

The Finance Board's survey included some higher-priced homes that
would not be reflected in OFHEO's data, sometimes resulting in a
higher calculated median price than OFHEO's data reflected.  In fact,
in 26 of the areas we reviewed, the Finance Board data showed higher
median home sales prices than did the OFHEO data.  According to
officials from Fannie Mae and Freddie Mac, including these jumbo
loans is the primary reason for that difference.  Specifically, the
Finance Board's data included purchase prices up to $750,000 and loan
amounts up to $500,000.\10 Conversely, OFHEO's data excluded all
jumbo loans because they exceed the conforming loan limit ($214,600
in 1997), meaning neither Fannie Mae nor Freddie Mac could have
purchased them. 


--------------------
\10 The Finance Board excludes purchase prices and loan amounts above
these thresholds to control for possible data entry errors on the
part of the lenders participating in its survey.  In 1998, the
Finance Board raised these thresholds to $856,000 for purchase prices
and $571,000 for loan amounts. 


   MEDIAN HOUSE PRICES ARE LOWER
   WHEN THEY ARE BASED ON
   CONVENTIONAL AND
   GOVERNMENT-INSURED LOANS
------------------------------------------------------------ Letter :5

Supplementing the Finance Board's or OFHEO's data with information on
prices of homes financed with government-insured mortgages reduces
the estimates of median prices across the board and within all of the
metropolitan areas we reviewed.  Homes financed with
government-insured mortgages typically cost less than homes financed
with conventional mortgages, but the Finance Board and OFHEO (with
few exceptions) collect data only on homes financed with conventional
mortgages.  Hence, including data on government-insured mortgages in
the calculation for a given area results in a lower median price of
homes. 

As table 1 shows, the effect of adding data on homes with
government-insured mortgages to the Finance Board's and OFHEO's
median price estimates is not uniform across all of the metropolitan
areas; that is, it does not reduce the median in each area by the
same amount.  When we added data on homes with government-insured
loans to the Finance Board's data, median prices in individual
metropolitan areas were 2 to 30 percent lower.  When we added these
data to OFHEO's data, median prices were 6 to 31 percent lower. 



                                Table 1
                
                  Effect of Adding Data on Government-
                Insured Loans to Finance Board and OFHEO
                     Median House Price Data in 42
                           Metropolitan Areas

                                           Number of areas
                                --------------------------------------
Percentage drop in estimated       Median based on
median                          Finance Board data     Median based on
house price when                               and      OFHEO data and
government-insured                     government-         government-
loans are added                    insured loans\a       insured loans
------------------------------  ------------------  ------------------
5 percent or less                                5                   0
6 to 10 percent                                 12                   1
11 to 15 percent                                12                  16
16 to 20 percent                                 7                  16
More than 20 percent                             3                   9
----------------------------------------------------------------------
\a Finance Board data were not available for this analysis in three
metropolitan areas. 

Sources:  GAO analysis based on data from the Federal Housing Finance
Board, the Office of Federal Housing Enterprise Oversight, FHA, and
the Department of Veterans Affairs. 

The effect that including government-insured loans has on the
estimated median price of homes in any given area depends on how much
government-insured lending (relative to all other types of lending)
was taking place in that area.  Where government-insured lending was
a relatively higher percentage of home loans, median prices decreased
by a greater degree than the decrease for the 42 areas taken as a
whole.  Conversely, where there was relatively less
government-insured lending in any given area, median prices also
decreased--but to a lesser degree than in metropolitan areas with
more government-insured lending. 


   FHA PLANS TO USE ADDITIONAL
   DATA SOURCES, INCLUDING OFHEO,
   TO IMPROVE ITS MEASUREMENT OF
   MEDIAN HOME SALES PRICES
------------------------------------------------------------ Letter :6

FHA is exploring additional data sources to supplement the Finance
Board's data and to improve its own measurement of median house
prices.  In part, this is in recognition of the importance and value
of timely and comprehensive data on house prices at the local level
for its own purposes as well as larger, research-oriented uses. 
Also, recent legislative changes have made it more important for FHA
to have accurate local-area measures of house prices on which to base
loan limits.  However, FHA has found no source that systematically
collects house price data on an ongoing basis in all of the
areas--metropolitan areas and counties--for which FHA must set loan
limits.  As a result, FHA has stepped up its efforts to determine the
availability of, and any limitations associated with, additional data
sources on home prices. 

FHA's most pressing reason for developing additional data sources is
a provision in recent legislation mandating that the highest loan
limit of any county within a metropolitan area must apply to loans
insured in all the counties in that area.  To implement this
provision as part of a recent comprehensive update of all FHA loan
limits, FHA supplemented its primary data source, the Finance Board
survey, with data from the National Association of Realtors and a
private marketing firm that collects and sells data from real estate
transaction records.  To a limited extent, FHA also had its field
staff work with local interested parties, such as realtors'
associations, to gather sufficient recent data on which to base an
estimate of an area's median house price.  Nonetheless, FHA officials
told us that for over half of those areas whose loan limits were not
automatically indexed to the conforming loan limit, the Finance
Board's survey was their primary source of median house price
data.\11

FHA's goal is to comprehensively update all of its loan limits
annually and, in doing so, to make use of additional data sources to
broaden the extent to which its estimates of median house prices
cover more of the housing market.  To do so, FHA recently initiated
preliminary discussions with OFHEO about making use of its data
(similar to the data OFHEO provided to us) in its next comprehensive
update.  In addition, FHA is considering obtaining data on jumbo
loans as well as other loans that Fannie Mae and Freddie Mac have not
purchased.  FHA has no specific timetable for including such data, in
large part because the sources of the data on some of these loans do
not include information on house sales prices, which makes using the
data much more methodologically complex and time-consuming than using
a database such as OFHEO's. 


--------------------
\11 For the recent comprehensive update, FHA used the Finance Board
as its data source for 30 of the 42 areas discussed in this report;
for 6 areas, FHA used data its field office staff gathered on local
real estate sales; and, in the remaining 6 areas, field office staff
determined that one county in the area had a higher loan limit than
the others and invoked the recently enacted provisions applying that
county's higher limit to the entire area. 


   OBSERVATIONS
------------------------------------------------------------ Letter :7

FHA has substantial discretion in choosing the source of median house
price data it will use to set loan limits because, unlike the
conforming loan limit, there is no statutory requirement for it to
use a specific data source.  Lacking a nationwide source of data that
systematically collects comprehensive house price information in each
and every area where FHA must set loan limits, the agency is left
with the challenge of assembling the best data available to it.  At
present, its use of the Finance Board's survey appears reasonable
given that the only more comprehensive source of data that we
found--HUD's Office of Federal Housing Enterprise Oversight--usually
yielded a similar median price. 

Nonetheless, while both the Finance Board and OFHEO offer measures of
median prices that capture one particular segment of the housing
market--homes with conventional financing--neither covers all of the
housing market.  As a result, FHA's efforts to broaden its coverage
of the housing market 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. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We provided a draft of this report to the Department of Housing and
Urban Development (HUD), the Federal Housing Finance Board (the
Finance Board), the Office of Federal Housing Enterprise Oversight,
the Federal National Mortgage Association, and the Federal Home Loan
Mortgage Corporation for their review and comment. 

HUD agreed that the Finance Board's survey is a reasonable source of
home sales price data even though neither the survey nor the Office
of Federal Housing Enterprise Oversight's information on home sales
covers the entire housing market.  HUD commented that the report
effectively describes the practices and resources it used to set FHA
loan limits and identifies the data collection obstacles associated
with this activity.  HUD also provided technical corrections to the
report, which we have incorporated.  HUD's comments are included as
appendix II of this report. 

The Finance Board agreed that our analysis indicates its survey is a
reasonable measure of 1997 home sales prices in the areas we
reviewed.  However, the Finance Board also commented that because its
data come from a voluntary sample of mortgage lenders, it cannot
ensure that its sample size in individual metropolitan areas or
counties is large enough to provide statistically reliable results. 
The Finance Board stated that if the Congress wants HUD to use the
survey, it should provide the Finance Board with the authority to
require lenders to participate in the survey.  We have reported in
the past that users of the Finance Board's data suggested the sample
size would need to be expanded to make the data more reliable for
measuring local housing prices.\12 We have revised our description of
the Finance Board's survey to clarify that lenders participate in it
voluntarily.  The Finance Board's comments are included as appendix
III of this report. 

The Office of Federal Housing Enterprise Oversight provided technical
corrections and clarifications to the report, which we have
incorporated as appropriate. 

The Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation also commented on the draft report.  Both stated
that they consider the data they provide the Office of Federal
Housing Enterprise Oversight to be proprietary and confidential.  We
agreed to add this information to the report.  The Federal Home Loan
Mortgage Corporation also provided technical corrections to the
report, which we have incorporated as appropriate. 


--------------------
\12 Housing Finance:  Implications of Alternative Methods of
Adjusting the Conforming Loan Limit (GAO/RCED-95-6, Oct.  5, 1994). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

Our review covered homes sold in selected metropolitan areas in
calendar year 1997 (1) for which FHA insured or the Department of
Veterans Affairs guaranteed the mortgages on the homes; (2) about
which the lenders issuing the mortgages for the homes reported data
on the loans in the Federal Housing Finance Board's monthly interest
rate survey; or (3) that had mortgages that Fannie Mae or Freddie Mac
subsequently purchased, reporting data on those loans to OFHEO.\13
For this analysis, we focused on the 42 metropolitan statistical
areas (MSA) for which the Finance Board publicly reports data
annually.\14 By definition, MSAs have at least one city with 50,000
inhabitants or are urbanized areas with a total metropolitan
population of at least 100,000.  Most MSAs consist of more than one
county. 

For the 42 areas, we obtained (1) from FHA and the Department of
Veterans Affairs, data on the median price of all of the homes sold
for which the federal government insured or guaranteed the
mortgages\15 and (2) from the Finance Board, the median purchase
price of all the homes sold whose mortgages were reflected in the
Board's monthly interest rate survey.  Using data on loan amounts and
loan-to-value ratios, OFHEO calculated and provided to us an estimate
of the median price of all homes sold in these areas that had
mortgages that were subsequently purchased by Fannie Mae or Freddie
Mac.  For this calculation, OFHEO used the data Fannie Mae and
Freddie Mac provide it for the calculation of its house price index
(unlike OFHEO's house price index, the data it provided us for this
review are not publicly released).  We then compared the median
purchase prices according to these sources of data.  Because homes
financed with government-insured loans are typically lower priced and
neither the Finance Board nor OFHEO includes data on
government-insured mortgages, we also calculated median purchase
prices that included data from FHA and the Department of Veterans
Affairs with the data from OFHEO and the Finance Board. 

Throughout our review, we discussed issues related to data sources
for measuring house price changes with officials from FHA, OFHEO,
HUD's Office of Policy Development and Research, the Finance Board,
Fannie Mae, and Freddie Mac.  We also supplemented this information
by discussing these issues with officials of private organizations
having an interest or expertise in this area, including the National
Association of Homebuilders and the Mortgage Insurance Companies of
America.  We also discussed the results of our analysis comparing
median prices from the various sources with officials from the
agencies that provided these data. 

We did not directly assess the reliability of the data we obtained
from FHA, the Department of Veterans Affairs, OFHEO, or the Finance
Board.  To assure ourselves that each data set was sufficiently
reliable for our purposes, we reviewed the procedures each agency had
in place to ensure its data are reliable and accurate. 

We conducted our review from July 1998 through March 1999 in
accordance with generally accepted government auditing standards. 


--------------------
\13 See appendix I for a complete list of these 42 areas. 

\14 The Finance Board also reports data on 18 consolidated
metropolitan statistical areas (CMSA), which are MSAs that have a
population of 1 million or more, separate component areas that are
identifiable and meet certain standards for designation as a
metropolitan area, and local support for the component areas. 
Because the Finance Board and OFHEO were more readily able to provide
data arrayed by MSA (rather than also disaggregating each CMSA's data
into the component MSAs), we focused our analysis on just the 42
MSAs. 

\15 In 1997, the Department of Agriculture's Rural Housing Service
guaranteed $2.4 billion in rural housing loans made by private
lenders.  However, because these loans are a relatively small part of
the mortgage market and are concentrated in rural--as opposed to
metropolitan areas--we have excluded them from our analysis. 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the appropriate congressional
committees; the Honorable Andrew Cuomo, Secretary of Housing and
Urban Development; the Honorable Bruce A.  Morrison, Chairman of the
Federal Housing Finance Board; the Honorable Mark Kinsey, Acting
Director of the Office of Federal Housing Enterprise Oversight; the
Honorable Franklin D.  Raines, Chairman and Chief Executive Officer
of Fannie Mae; the Honorable Leland C.  Brendsel, Chairman and Chief
Executive Officer of Freddie Mac; and the Honorable Jacob J.  Lew,
Director of the Office of Management and Budget.  We will make copies
available to others upon request. 

Please call me at (202) 512-7631 if you or your staff have any
questions about the material in this report.  Major contributors to
this report are listed in appendix IV. 

Sincerely yours,

Stanley J.  Czerwinski
Associate Director, Housing and
 Community Development Issues


METROPOLITAN AREAS IN WHICH GAO
COMPARED MEDIAN HOME SALES PRICE
DATA
=========================================================== Appendix I

Albany-Schenectady-Troy, New York
Atlanta, Georgia
Austin-San Marcos, Texas
Birmingham, Alabama
Buffalo-Niagara Falls, New York
Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina
Columbus, Ohio
Dayton-Springfield, Ohio
Fresno, California
Grand Rapids-Muskegon-Holland, Michigan
Greensboro-Winston-Salem-High Point, North Carolina
Greenville-Spartanburg-Anderson, South Carolina
Hartford, Connecticut
Honolulu, Hawaii
Indianapolis, Indiana
Jacksonville, Florida
Kansas City, Missouri-Kansas
Las Vegas, Nevada-Arizona
Louisville, Kentucky-Indiana
Memphis, Tennessee-Arkansas-Mississippi
Minneapolis-St.  Paul, Minnesota-Wisconsin
Nashville, Tennessee
New Orleans, Louisiana
Norfolk-Virginia Beach-Newport News, Virginia-North Carolina
Oklahoma City, Oklahoma
Omaha, Nebraska-Iowa
Orlando, Florida
Phoenix-Mesa, Arizona
Pittsburgh, Pennsylvania
Providence-Fall River-Warwick, Rhode Island-Massachusetts
Raleigh-Durham-Chapel Hill, North Carolina
Richmond-Petersburg, Virginia
Rochester, New York
Salt Lake City-Ogden, Utah
San Antonio, Texas
San Diego, California
St.  Louis, Missouri-Illinois
Syracuse, New York
Tampa-St.  Petersburg-Clearwater, Florida
Tucson, Arizona
Tulsa, Oklahoma
West Palm Beach-Boca Raton, Florida




(See figure in printed edition.)APPENDIX II
COMMENTS FROM THE DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
=========================================================== Appendix I




(See figure in printed edition.)APPENDIX III
COMMENTS FROM THE FEDERAL HOUSING
FINANCE BOARD
=========================================================== Appendix I



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Judy A.  England-Joseph
DuEwa A.  Kamara
Bill MacBlane
Mathew Scire


*** End of document. ***