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Highlights

Incomplete or inaccurate appraisals resulting in property overvaluations may expose the Department of Housing and Urban Development's (HUD) Single-Family Mortgage Insurance programs--which insured about 3.7million single-family mortgage loans with a total value of about $425 billion in fiscal years 2001 through 2003--to greater financial risks. In 1999, GAO reported on the need for improvements in HUD's oversight of appraisers, which has historically been a challenge for the department. Also, in the past, GAO reported that, due in part to poor oversight of appraisers, HUD's Single-Family Mortgage Insurance programs remained a high-risk area. GAO conducted this review as a follow up to the 1999 report. This report examines (1) how HUD ensures that appraisers it approves are qualified to perform FHA appraisals, (2) the extent to which HUD employs a risk-based monitoring approach, and (3) HUD's efforts to take enforcement action against noncompliant appraisers.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Housing and Urban Development To reduce the financial risks assumed by HUD and to further enhance its oversight of appraisers participating in HUD's Single-Family Mortgage Insurance programs, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to institute reasonable controls on the process of placing appraisers on the appraiser roster to ensure that applicants' conformance to eligibility criteria is verified.
Closed - Implemented
In November 2004 HUD developed and implemented a quality control plan for FHA appraiser roster eligibility verification to verify that compliance checks are conducted appropriately and that each file contains accurate information. This plan was implemented to improve the documentation verification process and to ensure that quality control reviews are performed on a regular and timely basis.
Department of Housing and Urban Development To reduce the financial risks assumed by HUD and to further enhance its oversight of appraisers participating in HUD's Single-Family Mortgage Insurance programs, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to consider a requirement to include, when targeting appraisers for review, those appraisers who have recently completed a sanction period in order to ensure that these appraisers have corrected their relevant deficiencies.
Closed - Implemented
HUD had been working with its systems contractor to reprogram a system to flag these appraisers for re-review and hoped that the change would be implemented by June 2005. However, HUD determined that in a given reporting period, the number of cases attributable to appraisers who recently completed a sanction period is so small as to make it difficult to justify expenditure on a system enhancement. Therefore, beginning in January 2005, HUD's system has been manually generating up to five case numbers on a quarterly basis that each of these appraisers has processed since being returned from sanction. HUD believes that this manual procedure implements the recommendation on a cost-effective basis since the procedure is simple, straightforward, and easily sustainable.
Department of Housing and Urban Development To reduce the financial risks assumed by HUD and to further enhance its oversight of appraisers participating in HUD's Single-Family Mortgage Insurance programs, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to maintain the historical information, particularly early loan default information, used to target appraisers for review in order to ensure that the HOCs target and review appraisers based on the criteria in HUD guidance.
Closed - Implemented
HUD updated its procedures for the monitoring and oversight of Federal Housing Administration (FHA) appraiser field review contractors. These procedures, effective in July 2005, were designed to improve upon FHA's risk-based targeting methodology and to respond to our audit recommendations by maintaining needed historical information. In January 2006, HUD issued updated revised procedures for the monitoring and oversight of FHA's field review contractors in order to further respond to our audit recommendations. These new procedures, which took effect in March 2006, provide instructions on record retention. Specifically, each HOC must maintain a record of the greater of five years or two years beyond any court proceeding; data used to target contractors each quarter; listing of contractors targeted and monitored; criteria under which each contractor was identified for monitoring and oversight; and findings from review of contractors and any actions taken. Maintenance of this historical information can help HUD to (1) ensure that the appropriate appraisers are being systematically targeted and reviewed based on its criteria and (2) determine the effectiveness of its targeting criteria in reducing risk to the mortgage insurance fund.
Department of Housing and Urban Development To reduce the financial risks assumed by HUD and to further enhance its oversight of appraisers participating in HUD's Single-Family Mortgage Insurance programs, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to implement a cost-effective field review contractor oversight process that includes on-site monitoring.
Closed - Implemented
HUD updated its procedures for the monitoring and oversight of Federal Housing Administration (FHA) appraiser field review contractors. These procedures, effective in July 2005, were designed to improve upon FHA's risk-based targeting methodology and to respond to our audit recommendations. In January 2006, HUD issued updated revised procedures for the monitoring and oversight of FHA's field review contractors to further respond to our audit recommendations. These new procedures, which took effect in March 2006, instruct HUD staff to select two appraisal field review cases performed by a contractor to evaluate the contractor's performance, and conduct on-site field reviews, physically visiting the subject property and each of the comparable sales used to appraise the subject property. On-site monitoring is an essential part of any monitoring process and is an important way to verify that work is actually being conducted and to accurately assess the quality of appraisals to help reduce risk to the mortgage insurance fund.

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