Homeownership:

Information on Changes in FHA's New Single-Family Appraisal Process

RCED-97-176: Published: Jul 25, 1997. Publicly Released: Jul 25, 1997.

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Pursuant to a congressional request, GAO provided information on the Federal Housing Administration's (FHA) appraisal process, focusing on: (1) how appraisals of FHA-insured single-family homes were assigned before December 1994, who assigned appraisal work, and why the appraisal assignment process changed; (2) what the reactions to this change have been from the affected parties--former FHA fee panel appraisers, FHA, and FHA lenders; and (3) what problems have been identified by the Department of Housing and Urban Development (HUD) since the implementation of the new appraisal assignment process. GAO did not attempt to verify any allegations of the former fee panel appraisers.

GAO noted that: (1) prior to December 1994, houses that were being appraised for FHA-insured home loans were appraised by FHA fee panel appraisers who were assigned on a rotational basis to lenders, and, in turn, lenders paid the fee panel appraisers for their services; (2) HUD's field offices had approximately 6,000 FHA fee panel appraisers to conduct the appraisals; (3) legislation was enacted in 1990 that allowed FHA's single-family lenders rather than FHA to choose the appraisers of properties whose loans were to be insured by FHA; (4) according to its history, this legislation was enacted to: (a) improve the efficiency of FHA lenders who would no longer have to rely on HUD's field office staff to assign appraisers; and (b) improve the quality and reliability of appraisal services for HUD's mortgage assistance and other housing programs by promoting uniform eligibility standards for those performing federal appraisals; (5) in January 1996, FHA informed its lenders that effective March 1, 1996, they had to select appraisers from FHA's roster of about 31,000 state-licensed or certified appraisers; (6) HUD also allowed lenders to use their in-house appraisers if they were on the roster and assigned by the lender; (7) those most directly affected by the change were particularly opposed to the change, charging that the appraisals now being performed were inaccurate, incomplete, or favorable to lenders; (8) FHA's appraisal manager and four FHA lenders cited, among other things, improved timeliness and quality of appraisals and a decrease in the number of HUD field office staff needed to administer the appraisal process as the reasons they support allowing lenders to select appraisers; (9) HUD has identified two problems--the lack of reviews for completed appraisals by staff in some HUD field offices and the decline in the number of women and minority appraisers selected by lenders--since the implementation of the new appraiser selection process; (10) the private accounting firm hired by HUD to conduct a financial audit of the agency found that the Los Angeles field office had not performed any required field reviews of completed appraisals in fiscal year 1996; (11) in addition, FHA's records show that 6 other HUD field offices had conducted few or no field reviews of completed appraisals from October 1, 1996, to June 20, 1997; and (12) HUD is currently reviewing various strategies aimed at resolving the problem of women and minority appraisers not being selected to perform a proportionate number of FHA appraisals.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: HUD established a policy that requires the field offices to review no less than 10 percent of all the appraisals conducted within their jurisdiction. HUD made this action part of its fiscal year 1998 Management Objectives.

    Recommendation: To reduce the financial risks assumed by FHA, the Secretary of Housing and Urban Development should reestablish a requirement that each HUD field office responsible for overseeing appraisals randomly select a specific percentage of completed FHA appraisals for field and desk review by either HUD staff or a licensed or certified appraiser who is not a member of FHA's roster of appraisers for lenders' selection.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: According to a HUD official, because HUD has made the 10-percent requirement part of the criteria used to rate the performance of field office staff, field performance relative to this requirement will be tracked.

    Recommendation: The Secretary of Housing and Urban Development should establish a process to ensure that such field offices meet this appraisal review requirement.

    Agency Affected: Department of Housing and Urban Development

 

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