Single-Family Housing:

Weaknesses in HUD's Oversight of the FHA Appraisal Process

RCED-99-72: Published: Apr 16, 1999. Publicly Released: May 17, 1999.

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Pursuant to a congressional request, GAO reviewed the Federal Housing Administration's (FHA) appraisal process, focusing on: (1) how well the Department of Housing and Urban Development (HUD) is monitoring the performance of the appraisers on its roster and implementing procedures for addressing consumers' complaints about FHA appraisals; (2) the extent to which HUD is holding appraisers accountable for poor-quality FHA appraisals; (3) the extent to which HUD is holding lenders responsible for the quality of the FHA appraisals they use; and (4) how HUD ensures that appraisers on its roster are qualified to perform FHA appraisals.

GAO noted that: (1) HUD is not doing a good job of monitoring the performance of appraisers; (2) on-site evaluations of completed appraisals, known as field reviews, are HUD's principal tool for assessing the quality of appraisers' work; (3) in fiscal year (FY) 1998, HUD performed about 81,000 of these reviews, but three of the four HUD homeownership centers (HOC) did not meet HUD's requirement to field review no less than 10 percent of the FHA appraisals performed within their jurisdictions; (4) although HUD's guidance states that timeliness is essential to ensure quality field reviews, half of the field reviews conducted in FY 1998 did not occur until more than 2 months after the appraisals had been performed; (5) moreover, HUD did not learn about problems with some appraisals until after it had already approved mortgage insurance for the properties; (6) the Philadelphia and Denver HOCs' records for 126 field reviews that rated the appraisals as poor showed that HUD approved mortgage insurance for 96 of the homes covered by these reviews; (7) HUD staff did not routinely visit appraised properties to determine the accuracy of the field review contractors' observations; (8) the Philadelphia and Denver HOCs did not fully implement guidance on the handling and tracking of consumers' complaints, including those relating to appraisals; (9) HUD is not holding appraisers accountable for the quality of their appraisals; (10) contrary to HUD's policy, appraisers who received two or more poor ratings in field reviews were frequently not prohibited from conducting further FHA appraisals; (11) a poor field review score indicates that the appraiser made errors and omissions that could result in an unacceptable insurance risk to FHA; (12) HUD has not aggressively enforced its policy to hold lenders equally accountable with the appraisers they select for the accuracy and thoroughness of appraisals because of a disagreement within HUD over its authority to do so; (13) HUD has limited assurance that the appraisers on its roster are knowledgeable about FHA's appraisal requirements; (14) HUD relies largely on the states' licensing process to ensure that appraisers are qualified, but the states' minimum licensing standards do not include proficiency in FHA's appraisal requirements; and (15) HUD is revising its appraisal guidance and forms to better clarify the roles and responsibilities of appraisers and is adopting a testing requirement for appraisers to ensure their competency in FHA's appraisal standards.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In fiscal year 1999, each of HUD's homeownership centers exceeded the requirement that it conduct field reviews of 10% of the FHA appraisals performed in its jurisdiction. Also, in June 2000, HUD adopted a new appraisal oversight system. One criterion used by the system to target appraisers for field review is whether the appraiser had been field reviewed in the last year. A second phase of the system, planned for October 2000, will target appraisers for field review based both on their last field review date and the appraisal volume.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of appraisers on FHA's roster, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to achieve better field review coverage of FHA's appraiser roster by: (1) ensuring that each HOC field reviews the required percentage of the FHA appraisals conducted annually within its geographic jurisdiction; and (2) requiring that when selecting appraisals for field review, HUD staff give higher priority to the work of appraisers who have done a substantial number of FHA appraisals but have not been field reviewed within the past year.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Not Implemented

    Comments: HUD disagreed with this recommendation. HUD stated that performing field reviews of appraisals prior to FHA's approval of mortgage insurance would unduly delay the insurance endorsement process for a significant number of FHA loans, could negatively impact the sale of FHA loans on the secondary market, and would add bureaucratic encumbrance to the insurance program. Also, according to HUD, its Homebuyer Protection plan will require lenders to submit certain appraisal data electronically and this electronic processing of appraisal data will speed up the field reviews process and help to satisfy GAO's concerns about the timeliness of field reviews. HUD has a pilot under way in which selected FHA lenders are electronically providing appraisal data that relate to the performance indicators that HUD will use to select appraisals for field review. HUD's plans are to require that all lenders begin providing appraisal data electronically in late 1999.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of appraisers on FHA's roster, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to make field reviews of appraisals more timely by establishing a process to ensure that HUD staff obtain copies of appraisal reports and perform field reviews prior to FHA's approval of mortgage insurance.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: In June 2000, HUD's Real Estate Assessment Center (REAC) implemented a quality assurance process to monitor the work of its national field review contractors that includes the on-site evaluations of field reviewed properties. The REAC quality assurance process provides that HUD will review each field review contract area twice a year. During these reviews, staff will visit and conduct on-site evaluations of properties that have been field reviewed by the contractors to verify the accuracy of the contractor's work. HUD plans to conduct 900 of the on-site reviews every year.

    Recommendation: To reduce the financial risks assumed by FHA and to improve HUD's oversight of appraisers on FHA's roster, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to better assess the quality of appraisal field reviews by insuring that a portion of each field review contractor's work is verified through on-site evaluation of properties field reviewed by the contractor.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: In December 2002, HUD issued a proposed rule clarifying and strengthening HUD's regulations concerning the reponsibilities of lenders in selecting appraisers. The proposed rule would codify existing HUD policy, which states that lenders are responsible, equally with the appraisers they select, for the quality of appraisals on properties that secure FHA-insured mortgages. The proposed rule would also change existing HUD regulations by making lenders who obtain and submit appraisals that do not meet FHA's requirements subject to administrative sanctions by HUD's Mortgagee Review Board. HUD believes that the proposed changes will help protect the FHA insurance fund, ensure better compliance with appraisal standards, and help ensure that homebuyers receive an accurate statement of appraised value.

    Recommendation: To improve HUD's oversight of lenders participating in FHA's programs, the Secretary of HUD should: (1) determine the Department's authority to hold FHA-approved lenders accountable for poor-quality FHA appraisals performed by the appraisers they select from FHA's roster; and (2) issue policy guidance that sets forth the specific circumstances under which and actions by which HUD may exercise this authority.

    Agency Affected: Department of Housing and Urban Development

 

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