oversight

Single-Family Housing: Weaknesses in HUD's Oversight of the FHA Appraisal Process

Published by the Government Accountability Office on 1999-04-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman, Subcommittee
                 on Housing and Community Opportunity,
                 Committee on Banking and Financial
                 Services, House of Representatives

April 1999
                 SINGLE-FAMILY
                 HOUSING
                 Weaknesses in HUD’s
                 Oversight of the FHA
                 Appraisal Process




GAO/RCED-99-72
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-280899

      April 16, 1999

      The Honorable Rick A. Lazio
      Chairman, Subcommittee on Housing
        and Community Opportunity
      Committee on Banking
        and Financial Services
      House of Representatives

      Dear Mr. Chairman:

      Numerous allegations and complaints about the poor quality of appraisals
      conducted for the purposes of mortgage insurance issued by the
      Department of Housing and Urban Development’s (HUD) Federal Housing
      Administration (FHA) have raised concerns about the FHA appraisal
      process. Appraisals influence the loan amounts that FHA insures, and
      incomplete or inaccurate appraisals resulting in overvaluations may
      expose FHA to greater financial risks. In fiscal year 1998, HUD insured
      mortgage loans for single-family housing totaling approximately
      $100 billion.

      In May 1998, we reported on the quality of FHA appraisals for nine homes in
      New Jersey and Ohio that a group of appraisers selected to illustrate their
      concerns about the completeness of some FHA appraisals.1 We noted that
      the appraisal reports for eight of the nine properties did not reflect
      conditions we observed that could adversely affect the structural
      soundness and continued marketability of the houses and the health and
      safety of the occupants. We also reported that HUD’s field offices did not
      adequately monitor the performance of the appraisers of these properties.
      In light of these problems, you asked us to conduct a broad assessment of
      HUD’s oversight of the FHA appraisal process.


      This report provides information on the following questions: (1) How well
      is HUD monitoring the performance of the appraisers on its roster and
      implementing procedures for addressing consumers’ complaints about FHA
      appraisals? (2) To what extent is HUD holding appraisers accountable for
      poor-quality FHA appraisals? (3) To what extent is HUD holding lenders
      responsible for the quality of the FHA appraisals they use? (4) How does
      HUD ensure that the appraisers on its roster are qualified to perform FHA
      appraisals? However, we did not estimate the impact that HUD’s oversight


      1
       Appraisals for FHA Single-Family Loans: Information on Selected Properties in New Jersey and Ohio
      (GAO/RCED-98-145R, May 6, 1998).



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                   of the appraisal process might have on the financial health of FHA’s
                   mortgage insurance fund.

                   To address these issues, we focused on the activities of HUD’s headquarters
                   and its Philadelphia and Denver homeownership centers (HOC). HUD
                   established four HOCs to administer the single-family housing functions
                   formerly performed by its 81 field offices. Together, the Philadelphia and
                   Denver HOCs account for about half of FHA’s single-family home loan
                   activity.


                   HUD  is not doing a good job of monitoring the performance of appraisers.
Results in Brief   On-site evaluations of completed appraisals, known as field reviews, are
                   HUD’s principal tool for assessing the quality of appraisers’ work. In fiscal
                   year 1998, HUD performed about 81,000 of these reviews, but three of the
                   four HUD homeownership centers did not meet HUD’s requirement to field
                   review no less than 10 percent of the FHA appraisals performed within their
                   jurisdictions. Of the 12,076 appraisers who performed 10 or more
                   appraisals between October 1, 1997, and June 30, 1998, 4,465, or
                   37 percent, had not been field reviewed. Although HUD’s guidance states
                   that timeliness is essential to ensure quality field reviews, half of the field
                   reviews conducted in fiscal year 1998 did not occur until more than 2
                   months after the appraisals had been performed. Moreover, HUD did not
                   learn about problems with some appraisals until after it had already
                   approved mortgage insurance for the properties. The Philadelphia and
                   Denver homeownership centers’ 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. In 37 of the 96 cases, the field
                   reviews were performed after mortgage insurance had been approved. In
                   addition, HUD staff did not routinely visit appraised properties to determine
                   the accuracy of the field review contractors’ observations. Finally, the
                   Philadelphia and Denver homeownership centers did not fully implement
                   guidance on the handling and tracking of consumers’ complaints,
                   including those relating to appraisals.

                   HUD is not holding appraisers accountable for the quality of their
                   appraisals. 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. A poor field review score indicates that
                   the appraiser made errors and omissions that could result in an
                   unacceptable insurance risk to FHA. During the first three quarters of fiscal
                   year 1998, 246 of the 5,768 field reviewed appraisers within the



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             Philadelphia and Denver homeownership centers’ jurisdictions received
             two or more poor field review scores, but only 11 of the appraisers were
             prohibited from doing subsequent FHA appraisals. Poor record-keeping by
             HUD’s field offices was the primary reason for the centers’ inability to
             pursue enforcement actions against other poorly performing appraisers.

             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 disagreement within HUD over its
             authority to do so. In May 1998, the Philadelphia Homeownership Center
             requested that HUD’s Mortgagee Review Board2 impose administrative
             sanctions against a lender who refused the center’s request to correct
             property deficiencies that the appraiser had overlooked. However, the
             Board never reviewed or acted on this request because the Board’s staff
             did not believe that HUD had the authority to hold the lender accountable
             for the quality of the appraisal simply because the lender had selected the
             appraiser. As a result, the homeownership centers have been reluctant to
             refer similar cases to the Board.

             HUD  has limited assurance that the appraisers on its roster are
             knowledgeable about FHA’s appraisal requirements. 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. 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.

             This report makes recommendations designed to improve HUD’s process
             for assessing completed FHA appraisals and to clarify the Department’s
             authority to hold lenders accountable for poor-quality appraisals.


             Each year, FHA helps hundreds of thousands of Americans finance home
Background   purchases. Established under the National Housing Act, FHA insures
             private lenders against losses on mortgages for single-family homes. FHA
             plays a particularly large role in certain market segments, including
             low-income borrowers and first-time homebuyers. The loan amount that
             FHA can insure is based, in part, on the appraised value of the home. If a
             borrower defaults and the lender subsequently forecloses on the loan, the

             2
              The Mortgagee Review Board is the entity within HUD that can impose administrative sanctions
             against a lender, withdraw a lender’s authority to make FHA-insured loans, or both.



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lender can file an insurance claim with HUD for nearly all of its losses,
including the unpaid balance of the loan. After the claim is paid, the lender
transfers the title to the home to HUD, which is responsible for managing
and selling the property. Most of the mortgages are insured by FHA under
its Mutual Mortgage Insurance Fund (Fund). To cover lenders’ losses, FHA
deposits insurance premiums paid by borrowers in the Fund and
historically, the Fund has been self-sufficient.

The purpose of an FHA appraisal is to (1) determine the property’s
eligibility for mortgage insurance on the basis of its condition and location
and (2) estimate the value of the property for mortgage insurance
purposes. In performing these tasks, the appraiser is required to identify
any visible deficiencies impairing the safety, sanitation, structural
soundness, and continued marketability of the property and to assess the
property’s compliance with FHA’s other minimum property standards.
According to HUD’s guidance, if an appraiser finds noncompliance with
these standards, the appraiser should include in the appraisal report an
appropriate and specific action to correct the deficiency.

Private mortgage lenders making FHA-insured loans for single-family
housing are required to select appraisers from FHA’s roster of about 31,500
state-licensed or -certified appraisers. In fiscal year 1998, 825,539
appraisals were performed for the purposes of FHA mortgage insurance.
Ninety-six percent of these appraisals were for existing homes, while the
remaining 4 percent were for newly constructed homes.

On-site assessments of completed appraisals, known as field reviews, are
HUD’s principal tool for monitoring the performance of the appraisers on
FHA’s roster. In conducting a field review, a HUD staff person or contractor
visits the appraised property to evaluate all aspects of the appraisal,
including whether the value determination was reasonable and whether all
needed repairs were identified.3 The field reviewer is required to
document his or her findings on a standard HUD form and recommend a
score using a scale from 1 to 5 (with 1 being unacceptable and 5 being
excellent).

As part of its 2020 Management Reform Plan announced in 1997, HUD
consolidated the single-family housing activities of its 81 field offices into
four HOCs, each of which is responsible for a multistate area. These
activities include processing mortgage insurance and functions related to

3
 The responsibility for selecting appraisals for field review, overseeing field review contractors, and
determining the final field review scores was transferred from HUD’s 81 field offices to its four HOCs
between February and December 1998.



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                        HUD’s oversight of appraisers and lenders participating in FHA’s programs.
                        The HOCs are located in Denver, Colorado; Atlanta, Georgia; Philadelphia,
                        Pennsylvania; and Santa Ana, California, and report directly to HUD’s Office
                        of Insured Single-Family Housing, which is responsible for implementing
                        FHA’s home mortgage insurance program. The consolidation of activities
                        into the four HOCs was carried out in phases and was completed in
                        December 1998. HUD has also established two new offices, the Real Estate
                        Assessment Center and the Enforcement Center, which are expected to
                        play important roles in HUD’s oversight of the FHA appraisal process.
                        According to HUD officials, the Assessment Center’s responsibilities will
                        include analyzing and tracking appraisal quality and appraiser
                        performance, and the Enforcement Center’s responsibilities will include
                        sanctioning appraisers, mortgage brokers, and lenders who do not comply
                        with HUD’s requirements.

                        On June 1, 1998, HUD announced a Homebuyer Protection Plan that
                        outlined reforms that HUD intends to make to the FHA appraisal process.
                        Specifically, the plan (1) requires that appraisals include a more thorough
                        basic survey of the physical condition of homes; (2) requires lenders to
                        inform potential homebuyers of defects found during appraisals;
                        (3) requires appraisers to recommend complete, detailed inspections of
                        homes if the appraisers find significant problems with the properties;
                        (4) allows up to $300 of home inspection costs to be financed through FHA
                        mortgages; and (5) imposes stricter accountability on appraisers and
                        tougher sanctions on those who act improperly, including fines and
                        potential prison sentences. HUD’s announcement did not identify a specific
                        timetable for implementing the plan.


                        HUD  is not doing a good job of monitoring the performance of appraisers,
HUD’s Monitoring of     thereby limiting the agency’s ability to assess the quality of appraisals used
Appraisers Is Limited   for FHA-insured loans. In fiscal year 1998, HUD performed about 81,000 field
                        reviews of appraisals nationwide. However, three of the four HOCs did not
                        meet HUD’s policy requirement to field review at least 10 percent of the FHA
                        appraisals performed within their jurisdictions. In addition, HUD’s records
                        for the first three quarters of fiscal year 1998 showed that over one-third of
                        the appraisers who conducted 10 or more appraisals during that period did
                        not have any of their work field reviewed. When field reviews were
                        performed, many were not timely. At the HOCs we visited, we found that
                        HUD staff did not routinely visit appraised properties to verify the work of
                        field review contractors and that they lacked adequate systems for
                        tracking consumers’ complaints about appraisals.



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Weaknesses Exist in Field   In September 1997, HUD established a policy requiring its HOCs and field
Review Coverage             offices to field review no less than 10 percent of the appraisals conducted
                            within their jurisdictions. HUD instituted this requirement in response to
                            our July 1997 report, which showed that some HUD field offices were
                            conducting few or no field reviews of appraisals.4 An official from HUD’s
                            Office of Insured Single-Family Housing told us that once HUD
                            consolidated its single-family housing activities into the four HOCs, the
                            10-percent standard no longer applied to HUD’s 81 field offices. Our
                            analysis of HUD’s data showed that three of the four HOCs did not meet the
                            10-percent requirement in fiscal year 1998. Specifically, the Philadelphia,
                            Denver, and Santa Ana HOCs reviewed 9.7, 8.3, and 8.1 percent of the total
                            appraisals performed in their jurisdictions, respectively. The Atlanta HOC
                            field reviewed 12.7 percent of the appraisals in its jurisdiction.


Many Appraisers With        HUD  did not field review the work of thousands of appraisers who
Significant Workloads       conducted 10 or more FHA appraisals during the period from October 1,
Were Not Field Reviewed     1997, through June 30, 1998. Our analysis showed that 25,560 appraisers
                            performed FHA appraisals during that period. Of the 12,076 appraisers who
                            performed 10 or more appraisals during that period, 4,465, or 37 percent,
                            had not been field reviewed. Among these 4,465 appraisers, 49 percent had
                            conducted between 10 and 19 appraisals, 20 percent had conducted
                            between 20 and 29 appraisals, and 31 percent had conducted 30 or more
                            appraisals. (See fig. 1.) While HUD’s procedures do not require field reviews
                            for appraisers doing a higher volume of appraisals, HUD had little
                            assurance that they were conducting accurate and thorough appraisals
                            without performance information on these individuals.




                            4
                             Homeownership: Information on Changes in FHA’s New Single-Family Appraisal Process
                            (GAO/RCED-97-176, July 25, 1997).



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Figure 1: Appraisers Who Conducted
10 or More Appraisals Between                                                             30 or more appraisals (1,402)
October 1, 1997, and June 30, 1998,
and Were Not Field Reviewed



                                               • 31%

                                                                     49% •                10 to 19 appraisals (2,174)




                                                 20%
                                                   •



                                                                                          20 to 29 appraisals (889)



                                      Source: GAO’s analysis of data from HUD.




                                      Philadelphia and Denver HOC officials told us that several factors
                                      contributed to problems with field review coverage. These factors
                                      included (1) HUD’s reliance on contractors to conduct field reviews and the
                                      unavailability of contract funds during the first several months of the fiscal
                                      year; (2) the reassignment of personnel during HUD’s reorganization,
                                      which, in some instances, left no one responsible for ordering field
                                      reviews; and (3) the lack of emphasis that some field offices placed on
                                      field reviews once they knew their functions would be transferred to the
                                      HOCs. HOC officials told us that they had placed a high priority on
                                      completing field reviews when they assumed this responsibility from the
                                      field offices but that they were constrained by the amount of time
                                      remaining in the fiscal year and the limitations on the number of field
                                      reviews that they could ask contractors to perform each month.

                                      As of February 1999, HUD was piloting a new process for selecting
                                      appraisals for field review. HUD plans to use statistical analysis of appraisal
                                      quality indicators (e.g., the completeness and mathematical accuracy of
                                      the appraisal report) to identify appraisals that may be problematic and,




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                          therefore, may be candidates for field review. According to HUD, this new
                          process will allow the Department to target appraisers who may be
                          performing poorly for field review instead of relying on the more random
                          process now being used.


Many Field Reviews Were   Although HUD’s guidance states that timeliness is essential to ensure the
Not Timely                quality of field reviews, a procedural change that HUD implemented in
                          November 1997 has significantly reduced the timeliness of these reviews.
                          Prior to November 1997, appraisers were required to send copies of their
                          appraisal reports directly to HUD. This arrangement allowed HUD to field
                          review some appraisals before the lenders closed on the loans and sent the
                          remaining loan documents to HUD for approval of FHA mortgage insurance.
                          However, effective November 1997, appraisers are no longer required to
                          send their appraisal reports to HUD, and HUD does not get a copy of the
                          appraisal report until the lender closes the loan and sends the appraisal
                          report to HUD as part of the loan case file. According to HUD officials, the
                          intent of this change was to reduce the amount of paperwork coming into
                          the HOCs. HUD officials also told us that planned computer system
                          enhancements would have allowed the HOCs to receive a sample of lenders’
                          appraisals prior to loan closing. However, the officials said these
                          enhancements had been delayed because of work priorities relating to
                          year 2000 compliance issues.

                          HUD’s records showed that half of the field reviews conducted in fiscal year
                          1998 were not done until at least 77 days after the appraisal had been
                          performed. In six of HUD’s field office jurisdictions, the corresponding
                          figure was 140 days or more. In contrast, HUD reported in fiscal year 1997
                          that all field reviews were being completed within 45 days of the
                          appraisals.

                          Philadelphia and Denver HOC officials told us that the reduced timeliness
                          of field reviews made it difficult to prevent the approval of FHA mortgage
                          insurance for loans based on faulty appraisals and reduced the usefulness
                          of field review reports as a monitoring and enforcement tool. For example,
                          the HOCs’ records for 126 field reviews conducted during the period from
                          October 1, 1997, through June 30, 1998, that rated the appraisals as poor,
                          showed that HUD approved mortgage insurance for 96 of the homes that
                          were the subjects of these reviews. In 37 of the 96 cases, the field reviews
                          were performed after HUD had already approved mortgage insurance for
                          the properties. We also noted one case in which the field reviewer gave the
                          appraisal a score of 2, in part because the appraiser had overlooked



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                            several repair conditions, including areas of the foundation in need of
                            repair and defective paint surfaces. A Philadelphia HOC official raised the
                            score to a 3 because the field review was performed 5 months after the
                            appraisal and some of the conditions needing repair could have developed
                            during that intervening period.


Oversight of Field Review   HUD relies primarily on licensed appraisers under contract with HUD to
Contractors Was Limited     conduct field reviews of completed appraisals. About three-fourths of the
                            80,958 field reviews conducted in fiscal year 1998 were performed by
                            contractors, while the remainder were performed by HUD staff. At HUD’s
                            Philadelphia and Denver HOCs, we found that the staff did not routinely
                            verify the observations of field review contractors or systematically
                            evaluate the contractors’ performance as required.

                            HUD’s  policy guidance stresses the importance of evaluating the work of
                            field review contractors and states that 5 percent of every contractor’s
                            work should be reviewed and rated on scale from 1 to 5 (with 1 being
                            unacceptable and 5 being excellent). The purpose of this rating system is
                            to document performance problems and justify disciplinary actions
                            against field review contractors, if necessary. Although HUD’s guidance is
                            unclear on this point, an official from HUD’s Office of Insured Single-Family
                            Housing told us that the review process was supposed to include a visit by
                            HUD staff to properties the contractors had field reviewed. Officials at both
                            the Philadelphia and Denver HOCs told us that they rarely conducted such
                            evaluations because they lacked sufficient staff and travel resources. They
                            said that, as a result, they neither tracked the percentage of each
                            contractor’s work that received an on-site review nor evaluated the
                            contractors’ performance using the numerical rating system.

                            According to HUD, the HOCs are currently administering over 250 small field
                            review contracts, most of which they inherited from the field offices as the
                            work from the field offices was consolidated under the HOCs. Because HUD
                            has found it difficult to monitor such a large number of contracts, the
                            agency is planning to contract out the field review function to a small
                            number of large appraisal firms. It also plans to have HUD staff perform
                            quality assurance reviews of the contractors.




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HOCs Did Not Fully       Consumers’ complaints are another means by which HUD obtains
Implement Guidance on    information about the quality of the appraisals used to support FHA-insured
Consumer Complaint       mortgages. In a December 1997 policy memorandum, HUD’s Deputy
                         Assistant Secretary for Single-Family Housing required the HOCs to
Procedures               establish written consumer complaint procedures and to maintain certain
                         types of information about the complaints they received, including those
                         relating to appraisals. During our visits to the Philadelphia and Denver
                         HOCs, we found that the centers had yet to develop written complaint
                         procedures. In October 1998, HUD officials told us that the Philadelphia HOC
                         was developing a set of written procedures for all four HOCs to follow. We
                         also found that the Philadelphia and Denver HOCs did not have complaint
                         tracking systems that contained all of the information required by the
                         December 1997 policy memorandum. Both HOCs maintained logs showing,
                         among other things, the HOC official assigned to follow up on a complaint
                         and the date the follow-up action was completed. However, these logs did
                         not include other required information, such as the nature of the
                         complaint, the actions taken to address the complaint, or the final
                         disposition of the complaint. This information would enable the HOCs’
                         management to readily determine the frequency of different types of
                         complaints and ensure that all complaints are being resolved in an
                         appropriate manner.


                         Contrary to HUD’s policy, most appraisers within the Philadelphia and
Few Poorly               Denver HOCs’ jurisdictions who received two or more poor ratings in field
Performing               reviews during the first three quarters of fiscal year 1998 were allowed to
Appraisers Were          continue performing appraisals for FHA. Of the 5,768 appraisers within the
                         two HOCs’ jurisdictions who were field reviewed during this period, 246
Sanctioned               received two or more poor field review scores. HUD prohibited only 11 of
                         these appraisers from conducting further FHA appraisals. Poor
                         record-keeping by HUD’s field offices and other factors hampered the HOCs’
                         ability to take enforcement actions against other poorly performing
                         appraisers.


HUD’s Policy Calls for   HUD’s  policy states that appraisers who receive two or more poor scores in
Sanctioning Poorly       field reviews during any 12-month period should be temporarily prohibited
Performing Appraisers    from conducting further FHA appraisals. A poor field review rating (i.e., a
                         score of 1 or 2 on a scale of 1 to 5) indicates that the appraiser did not
                         adequately support the value assigned to the home, overlooked serious
                         repair conditions, or made other errors and omissions that could result in
                         an unacceptable insurance risk to FHA. HUD’s HOCs may impose an



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                        administrative sanction, called a limited denial of participation, that
                        excludes an appraiser from participating in FHA programs for up to a year.5


Numerous Appraisers     Our analysis of field review results recorded in HUD’s Computerized Homes
Received Two or More    Underwriting Management System (CHUMS) showed that 205 appraisers
Poor Scores in Field    within the Philadelphia HOC’s jurisdiction and 41 appraisers within the
                        Denver HOC’s jurisdiction received two or more poor scores in field
Reviews                 reviews during the period from October 1, 1997, through June 30, 1998.
                        These 246 appraisers accounted for about 19,100, or 6 percent, of the
                        approximately 303,000 FHA appraisals performed during this period in the
                        two HOCs’ jurisdictions. These appraisers combined had 749 field reviews
                        in which they received scores of 1 or 2. A separate analysis by HUD’s Office
                        of Insured Single-Family Housing indicated that this problem was not
                        limited to the Philadelphia and Denver HOCs. HUD’s analysis showed that
                        between May 1997 and May 1998, a total of 723 appraisers nationwide had
                        received two or more poor scores in field reviews but were still active
                        members of HUD’s appraiser roster.

                        As of October 1, 1998, HUD had taken enforcement actions against 11 of the
                        246 appraisers we reviewed and prohibited them from performing FHA
                        appraisals, in most cases for up to a year. Of the 11 enforcement actions, 5
                        were taken by the Philadelphia HOC, 3 by the Denver HOC, and 1 each by
                        HUD’s Delaware, Montana, and Utah field offices. Of the appraisers we
                        reviewed who were not subject to enforcement actions, several had
                        received a substantial number of poor field review scores. For example,
                        one Buffalo-area appraiser received poor scores in 9 field reviews, and a
                        Detroit-area appraiser received poor scores in 22 field reviews.

                        As of October 1, 1998, the two HOCs had taken enforcement actions against
                        12 other appraisers who were not among the 246 appraisers we reviewed.


Missing Documentation   HUD’s policy is to sanction appraisers only when there is substantial
Impeded Enforcement     evidence and documentation of performance that is less than acceptable.
Efforts                 Philadelphia and Denver HOC officials told us that their efforts to sanction
                        appraisers had been hampered primarily by a lack of supporting
                        documentation. They said that other factors that impeded their
                        enforcement efforts were the age of some of the field reviews and the lack

                        5
                         Procedures for limited denials of participation afford the appraiser the opportunity for a hearing
                        before a departmental hearing officer. Therefore, to issue a limited denial of participation, the HOCs
                        must obtain concurrence from the Office of General Counsel at both the field office and headquarters
                        levels.



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of evidence that the appraisers had been given the chance to appeal the
poor field review ratings.

At the Philadelphia HOC, we reviewed the files for 72 of the 205 appraisers
who received two or more poor field review scores, including at least one
score of 1, during the period from October 1, 1997, through June 30, 1998,
to determine the basis for these scores. At the Denver HOC, we reviewed
the files for all 41 appraisers who received two or more poor field review
scores during the same period. HUD’s field offices began transferring these
files to the HOCs in February 1998.

We found at both the Philadelphia and Denver HOCs that most of the field
review reports that supported the poor field review scores recorded in
HUD’s CHUMS were not in the appraisers’ files. At the Philadelphia HOC, we
found that 196, or 65 percent, of the 301 poor ratings were not documented
by field review reports in the files. As a result, the HOC’s files contained
documentation of two or more poor scores for just 31 of the 72 appraisers
we reviewed. For 8 of those 31 appraisers, the documentation showed that
HUD officials had raised one or more of the field review scores, with the
result that these appraisers no longer had two or more poor scores for the
period we reviewed.6 At the Denver HOC, we found that 66 of the 101 poor
ratings were not documented by field review reports in the files.
Consequently, the HOC had documentation of two or more poor scores for
only 16 of the 41 appraisers we reviewed.

HOC  officials told us that the appraiser files they had received from certain
HUD  field offices were incomplete, reflecting the poor record-keeping and
lax enforcement efforts of these offices before and during the
consolidation of HUD’s single-family housing activities. Philadelphia and
Denver HOC officials told us that they would continue to monitor the
performance of appraisers who had received poor scores in the past. Both
HOCs have established appraiser files to document and maintain the results
of field reviews and are developing computerized information systems to
track appraisers’ field review scores, in accordance with HUD’s policy
guidance.

Of the 126 field review reports we found in the two HOCs’ files that
assigned poor scores to the appraisers we reviewed, 76, or 60 percent,
cited problems with the appraisers’ valuation of the properties. Figure 2
shows the percentage of the field review reports that cited certain types of

6
 In accordance with HUD’s procedures, HUD officials raised the scores after reviewing the field review
reports and, in some cases, additional information provided by the appraisers. The officials determined
that the poor scores were not justified in these cases.



Page 12                                     GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
                                       B-280899




                                       deficiencies in the appraisals. In most cases, the field reviews found more
                                       than one type of deficiency in each appraisal.


Figure 2: Reasons Cited in Field
Review Reports for Poor Field Review   65   Percentage of reports
Scores                                 60
                                       55
                                       50
                                       45
                                       40
                                       35
                                       30
                                       25
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                                       Source: GAO’s analysis of data from HUD.




                                       As part of its Homebuyer Protection Plan, HUD is revising its guidance for
                                       sanctioning appraisers. The guidance includes a matrix that shows the
                                       appropriate enforcement actions, including civil and criminal penalties,
                                       associated with various infractions of HUD’s appraisal policies and
                                       standards. The HOCs and HUD’s Enforcement Center will share the
                                       responsibility for taking enforcement actions against appraisers.
                                       According to HUD, the process of issuing limited denials of participation to
                                       remove appraisers from FHA’s roster can be difficult and time-consuming.
                                       As a result, HUD is drafting regulations that, if approved, would enable its
                                       HOCs to remove poorly performing appraisers from FHA’s roster more
                                       easily.




                                       Page 13                                    GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
                           B-280899




                           HUD’s  policy is that lenders are responsible, equally with the appraisers
HUD Has Not                they select, for the accuracy and thoroughness of appraisals. HUD has not
Aggressively Enforced      aggressively enforced this policy because of disagreement within HUD over
Its Policy on Lenders’     its authority to do so. In May 1998, the Philadelphia HOC requested that
                           HUD’s Mortgagee Review Board sanction a lender who refused to correct
Accountability for         property deficiencies that the appraiser had overlooked. This was the first
Appraisals                 case of this type that had been referred to the Board. However, the Board
                           never reviewed or acted on this request because the Board’s staff did not
                           believe that HUD had the authority to hold a lender accountable for the
                           quality of an appraisal simply because the lender selected the appraiser. As
                           a result, the HOCs have been reluctant to refer similar cases to the Board.


HUD’s Policy on Lenders’   In October 1994, HUD issued regulations implementing a legislative
Accountability for         provision that allowed lenders to choose the appraisers of properties to be
Appraisals                 insured by FHA.7 While the legislation did not address this issue, HUD’s
                           regulations stated that lenders who selected their own appraisers were
                           equally responsible, along with the appraisers, for the accuracy, integrity,
                           and thoroughness of the appraisals. In May 1996, HUD repealed these
                           regulations as part of a larger federal effort to reduce regulations.
                           According to HUD, the regulations were not necessary because many of the
                           standards in the regulations were already in HUD’s handbook guidance and
                           mortgagee letters issued to lenders.

                           HUD  issued mortgagee letters to lenders in November 1994 and again in
                           May and November of 1997 that reiterated its policy that lenders were
                           equally responsible for the quality of appraisals. Also, in a December 1997
                           policy memorandum, HUD’s Deputy Assistant Secretary for Single-Family
                           Housing instructed HUD staff that in cases in which appraisers missed
                           serious repair conditions or significantly overvalued properties, HUD
                           should request that the lenders who selected the appraisers pay for the
                           needed repairs or pay down the mortgages by the amounts the properties
                           were overvalued. The Deputy Assistant Secretary also indicated that the
                           failure of a lender to voluntarily resolve the appraisal deficiencies raised
                           by HUD would result in enforcement action against the lender, including
                           probation and suspension.




                           7
                            Section 322 of the Cranston-Gonzalez National Affordable Housing Act of 1990 amended section
                           202(e) of the National Housing Act, allowing lenders to choose the appraisers of properties for which
                           mortgages are to be insured by FHA.



                           Page 14                                     GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
                             B-280899




Pennsylvania Case Raises     In September 1997, a Pennsylvania homeowner complained to the
Questions About HUD’s        Philadelphia HOC that an independent inspection of her FHA-insured home
Authority to Hold Lenders    had found numerous violations of FHA’s minimum property standards that
                             she believed should have been identified by the appraiser. A subsequent
Accountable for Appraisals   HUD field review confirmed that the appraiser had missed repairs that were
                             necessary to correct health and safety problems with the home. In
                             January 1998, the Philadelphia HOC temporarily suspended the appraiser
                             and prohibited him from taking further FHA appraisal assignments for 90
                             days. In addition, the HOC sent a letter to the Pennsylvania mortgage
                             company that had selected the appraiser, requesting that the lender either
                             make approximately $7,500 in repairs to the home or prepay the mortgage
                             by that amount.

                             In April 1998, attorneys for the lender informed HUD by letter that the
                             lender had declined to pay for the repairs or prepay the mortgage. Among
                             other things, the letter stated that (1) the lender did not know the
                             appraiser had performed the appraisal in an unsatisfactory manner;
                             (2) there was no basis to believe that the lender should have known about
                             the unsatisfactory nature of the appraisal; (3) there was no financial tie,
                             business affiliation, or conflict of interest between the lender and the
                             appraiser; and (4) HUD did not have the authority to hold lenders
                             responsible for the acts, errors, or omissions of independent appraisers.

                             Because of the lender’s refusal to make the repairs or to prepay the
                             mortgage as requested, the Philadelphia HOC in May 1998 referred the case
                             to the Mortgagee Review Board for appropriate action against the lender.
                             The Board is the entity within HUD that can impose administrative
                             sanctions against a lender or withdraw a lender’s authority to make
                             FHA-insured loans. However, the Board never reviewed this case. In
                             discussing this case with the Board’s Secretary and the Deputy Chief
                             Counsel for HUD’s Enforcement Center, we were told that the Board’s staff
                             did not forward the HOC’s referral to the Board because the staff did not
                             believe that HUD had the authority to hold lenders liable for the actions of
                             independent appraisers simply because the lenders had selected the
                             appraisers. According to the Deputy Chief Counsel, the Philadelphia HOC
                             had no authority to assess the lender $7,500 because this constituted a
                             civil penalty against the lender and only the Board had the authority to
                             assess such penalties. While the Deputy Chief Counsel noted that there
                             were circumstances in which HUD could hold lenders accountable for the
                             work of appraisers, both he and the Board’s Secretary indicated that HUD’s
                             policy, as written, was improperly attempting to hold lenders absolutely
                             liable for the work of appraisers selected by the lenders. The Board’s



                             Page 15                         GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
                      B-280899




                      Secretary told us that he would soon draft a response to the Philadelphia
                      HOC about the referral, but as of January 1999, no response had been
                      prepared.

                      The Director of the Philadelphia HOC told us that he would like the Board
                      to either sustain HUD’s policy of holding lenders responsible for appraisals
                      or rule that HUD does not have such authority. He said that the HOC had two
                      other cases that it would like to refer to the Board, including one in which
                      another lender had also refused the HOC’s request to pay for repair
                      conditions missed by the appraiser. The Director said he saw no benefit in
                      forwarding other cases to the Board until it has made a decision on the
                      HOC’s first referral. In October 1998, officials at the Denver HOC told us that
                      they had not referred any lenders to the Board for using poor-quality
                      appraisals, in part, because it was difficult to know where to lay the blame
                      in such cases and that the issue had not been tested in court. They said a
                      lender would vigorously fight any sanctions imposed on it for relying on a
                      faulty appraisal because of the precedent such an action would set.


                      HUD  has limited assurance that the appraisers on FHA’s roster are
HUD Has Limited       knowledgeable of FHA’s appraisal requirements. Appraisers must be
Assurance That        state-licensed or -certified to qualify for FHA’s appraiser roster, but the
Appraisers Are        states’ minimum licensing standards do not require expertise in
                      conducting FHA appraisals. HUD is revising its appraisal guidance and forms
Familiar With FHA’s   and is adopting a testing requirement for appraisers.
Requirements
HUD’s Eligibility     To be eligible for FHA’s roster, appraisers must be state-licensed or
Requirements for      -certified in accordance with the minimum criteria established by the
Appraisers            Appraiser Qualifications Board of the Appraisal Foundation.8 The
                      Qualifications Board’s minimum licensing criteria require that appraisers
                      have 90 hours of classroom education in subjects related to real-estate
                      appraisals, have 2,000 hours of appraisal experience, and pass the
                      Qualifications Board’s endorsed examination or an equivalent
                      examination. To be placed on FHA’s roster, an appraiser must submit an
                      application and a copy of his or her license or certification to the HOC
                      within whose jurisdiction the appraiser intends to work. The appraiser
                      must certify on the application form that he or she has read or will read



                      8
                       The Appraisal Foundation is a not-for-profit educational organization established in 1987. In 1989, the
                      Financial Institutions Reform, Recovery, and Enforcement Act adopted the Appraiser Qualifications
                      Board’s qualification criteria for professional appraisers.



                      Page 16                                     GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
                      B-280899




                      HUD’s handbook on valuation analysis before accepting an FHA appraisal
                      assignment.

                      HUD’s CHUMS  contains licensing information for the appraisers on FHA’s
                      roster. Our analysis of the appraisal license expiration dates in CHUMS
                      indicated that the approximately 31,500 appraisers on FHA’s roster as of
                      August 1998 held current licenses or certifications. In addition, using a
                      national database maintained by the Appraisal Subcommittee of the
                      Federal Financial Institutions Examination Council, we confirmed that the
                      246 Philadelphia and Denver HOC appraisers who received poor field
                      review scores held current licenses.

                      At the time HUD adopted its procedures for allowing lenders to select their
                      own appraisers in 1994, it recognized that appraisers would need training
                      in FHA’s appraisal requirements and procedures. Unlike appraisals for
                      conventional mortgages, appraisals for FHA-insured mortgages must
                      include an assessment of the properties’ compliance with FHA’s property
                      standards as well as appropriate and specific actions to correct conditions
                      not in compliance with these standards. In addition, the value an appraiser
                      assigns to a property must reflect its value with all the required repairs
                      completed. While HUD encouraged its field offices and local appraiser and
                      lender associations to sponsor training in FHA appraisals, it decided not to
                      make training a condition for placement on FHA’s roster. HUD decided to
                      rely instead on lenders’ selecting only knowledgeable appraisers and on
                      appraisers’ not accepting appraisal assignments that they were not
                      competent to perform.


HUD Is Revising Its   In conjunction with its Homebuyer Protection Plan, HUD is developing a
Appraisal Forms and   new appraisal report to record the results of appraisals. HUD believes that
Guidance              this report will provide more information about the physical condition of
                      the appraised property than HUD’s current appraisal forms and will allow
                      the appraiser to better identify health and safety hazards and structural
                      problems that may require repairs. The new report lists specific physical
                      conditions that the appraiser should check for and requires the appraiser
                      to recommend whether a complete home inspection or some other type of
                      inspection (e.g., electrical, roofing, or structural) should be conducted.
                      HUD will require lenders to provide a summary of the report to homebuyers
                      so that homebuyers will have information about needed repairs and
                      recommended inspections.




                      Page 17                         GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
              B-280899




              HUD  has also drafted revised handbook guidance for appraising
              single-family homes. The handbook updates and consolidates information
              currently fragmented among numerous HUD handbooks and mortgagee
              letters. The draft handbook clarifies the roles and responsibilities of the
              appraiser, outlines protocols for appraisers to follow when conducting FHA
              appraisals, and specifies sanctions HUD will take against poorly performing
              appraisers. HUD expects to finalize and issue the handbook in April 1999.

              HUD  is also in the process of adopting a requirement that appraisers pass a
              test on FHA appraisal requirements and procedures to be eligible to
              perform FHA appraisals. HUD plans to begin testing in June 1999.


              The importance of appraisals to FHA and prospective homeowners
Conclusions   underscores the need for effective oversight of the appraisal process. FHA
              relies on appraisals to ensure that the billions of dollars in mortgage loans
              it insures annually accurately reflect the value of the homes being
              purchased. FHA homebuyers rely on appraisals, in part, to avoid buying
              homes with major defects that are costly to fix. However, weaknesses in
              HUD’s oversight of the FHA appraisal process have increased FHA’s risk of
              insuring properties that are overvalued or whose owners may default on
              their FHA-insured loans because of unexpected repair costs. The
              consequence of this increased risk is higher potential losses to FHA’s
              insurance fund.

              HUD  could significantly improve its monitoring of appraisers. HUD has not
              ensured that the HOCs are meeting the agency’s requirements to field
              review 10 percent of all FHA appraisals. Also, HUD’s procedures do not
              target for field review appraisers who perform significant numbers of FHA
              appraisals. In addition, a procedural change by HUD has made field reviews
              less timely, with the result that HUD did not learn of problems with certain
              appraisals until after HUD had already approved mortgage insurance on the
              properties. Moreover, the two HOCs we visited did not regularly verify the
              work of field review contractors through on-site evaluations and lacked
              tracking systems necessary to readily determine the nature, frequency, and
              resolution of complaints from FHA homebuyers. These problems weaken
              HUD’s ability to accurately assess the quality of the appraisals used to
              support the loans FHA insures.

              HUD’s  ability to sanction poorly performing appraisers was seriously
              impaired by the loss or misplacement of records prior to and during HUD’s
              field consolidation. Consequently, hundreds of appraisers whose work



              Page 18                          GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
                      B-280899




                      may be creating an unreasonable underwriting risk for FHA continue to
                      conduct appraisals for FHA-insured mortgages. However, the two HOCs we
                      visited have taken steps toward enforcing FHA’s performance standards for
                      appraisers.

                      HUD has not resolved internal disagreements about its authority and policy
                      to hold lenders accountable for poor-quality appraisals. As a result, it has
                      not aggressively enforced this policy. By not resolving this issue, HUD is
                      sending a confusing message to both lenders and FHA borrowers about
                      who is responsible for the quality of appraisals and what remedies exist
                      when an appraisal is unsatisfactory.

                      HUD’s reliance on the states’ licensing process and self-certification provide
                      limited assurance that the appraisers on FHA’s roster are knowledgeable of
                      FHA’s appraisal requirements. The states’ minimum licensing standards do
                      not require proficiency in FHA’s guidelines, and HUD is considering, but has
                      not implemented, its own testing requirement. HUD’s revision of its
                      appraisal guidance and forms and its plans to test appraisers on their
                      knowledge of FHA appraisal requirements are likely to help appraisers
                      perform their work in accordance with FHA standards.


                      To reduce the financial risks assumed by FHA and to improve HUD’s
Recommendations       oversight of appraisers on FHA’s roster, we recommend that the Secretary
                      of HUD 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 (currently
                      10 percent) 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;
                  •   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; and
                  •   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.




                      Page 19                          GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
                  B-280899




                  To improve HUD’s oversight of lenders participating in FHA’s programs, we
                  recommend that the Secretary of HUD (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.



                  We provided a draft copy of this report to HUD for its review and comment.
Agency Comments   In its letter commenting on the report, HUD said that the report did not
                  describe the changes the Department had made to FHA’s single-family
                  mortgage insurance programs. HUD indicated that, prior to our report, FHA
                  management had already identified appraisal quality as an area needing
                  improvement and had announced a Homebuyer Protection Plan to address
                  this problem. Because the report contains ample discussion of the
                  Department’s Homebuyer Protection Plan and other steps HUD has taken
                  to improve the FHA appraisal process, we did not make any changes to the
                  report.

                  In commenting on our recommendation that HUD achieve better field
                  review coverage of FHA’s appraiser roster, HUD indicated that it will
                  implement a revised field review process by July 1, 1999, that will improve
                  the Department’s sampling and targeting of appraisers for field review. In
                  response to our recommendation that HUD conduct on-site evaluations of a
                  portion of each field review contractor’s work, HUD indicated that it would
                  begin performing supervisory reviews of field review contractors in
                  conjunction with a national field review contract scheduled to begin in
                  July 1999. Regarding our recommendation that HUD determine its authority
                  to hold FHA-approved lenders accountable for poor-quality appraisals, HUD
                  responded that it would target for monitoring those lenders that used
                  poorly performing appraisers. Because HUD’s response did not address the
                  Department’s authority to hold FHA-approved lenders accountable for
                  poor-quality appraisals, we believe that HUD still needs to clarify this
                  matter and issue policy guidance that reflects this clarification.

                  HUD disagreed with our recommendation to improve the timeliness of
                  appraisal field reviews by obtaining copies of the appraisal reports and
                  performing field reviews prior to loan closings and the approval of FHA
                  mortgage insurance. HUD indicated that the collection of all appraisals and
                  the performance of field reviews before the approval of mortgage
                  insurance would be impractical and inconsistent with HUD’s Direct



                  Page 20                         GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
              B-280899




              Endorsement Program, which allows qualified mortgagees to process and
              close FHA loans without prior review by HUD. We modified this
              recommendation to reflect the fact that it may be difficult for HUD to field
              review appraisals before the lenders close on the loans. However, we
              continue to believe that it would be feasible for HUD to field review, in
              advance of approving mortgage insurance, those appraisals that the
              Department has selected for field review. For example, HUD could require
              lenders to submit copies of selected appraisal reports immediately after
              the Department makes the selections rather than waiting for the lenders to
              include the appraisal reports as part of the loan files sent to HUD prior to
              the endorsement of mortgage insurance. We believe that such a procedure
              would not infringe on the underwriting responsibilities of Direct
              Endorsement lenders and would improve the quality and usefulness of
              field reviews by (1) significantly reducing the time elapsed between
              appraisals and the field reviews of those appraisals and (2) reducing HUD’s
              risk of insuring mortgages based on faulty appraisals.

              The full text of HUD’s letter is presented in appendix I.


              We conducted our work at HUD’s headquarters and its Philadelphia and
Scope and     Denver HOCs. Together, the two HOCs account for about half of FHA’s loan
Methodology   activity for single-family housing. We interviewed officials from HUD’s
              Office of Insured Single-Family Housing, Real Estate Assessment Center,
              Enforcement Center, Mortgagee Review Board, and Philadelphia and
              Denver HOCs. We reviewed laws, regulations, mortgagee letters, and other
              documents related to the FHA appraisal process and developed information
              on HUD’s procedures for monitoring appraisers, overseeing field review
              contractors, and handling consumers’ complaints. We analyzed data from
              HUD’s CHUMS for information on the currency of appraisal licenses for
              appraisers on FHA’s roster and the number of appraisers who received two
              or more poor scores in field reviews during the first three quarters of fiscal
              year 1998. We reviewed HOCs’ files for documentation of field review
              scores, information on enforcement actions against appraisers and
              lenders, and on the nature of consumers’ complaints. Appendix II provides
              additional details on our scope and methodology.

              We performed this review from May 1998 through April 1999 in
              accordance with generally accepted government auditing standards.




              Page 21                           GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
B-280899




As arranged with your office, unless you publicly release its contents
earlier, we plan no further distribution of this report until 30 days after the
date of this letter. At that time, we will send copies of this report to
Representative Barney Frank, Ranking Minority Member, House
Subcommittee on Housing and Community Opportunity; Representative
James A. Leach, Chairman, and John J. LaFalce, Ranking Minority
Member, House Committee on Banking and Financial Services; and
Senator Phil Gram, Chairman, and Paul S. Sarbanes, Ranking Minority
Member, Senate Committee on Banking, Housing, and Urban Affairs. We
will also send copies of this report to The Honorable Andrew M. Cuomo,
Secretary of HUD; The Honorable William C. Apgar, HUD Assistant Secretary
for Housing-Federal Housing Commissioner; and The Honorable Jacob J.
Lew, Director, 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.
Major contributors to this report were Paul Schmidt, Steve Westley, Jackie
Garza, Stan Ritchick, Mitch Karpman, and John McGrail.

Sincerely yours,




Judy A. England-Joseph
Director, Housing and Community
  Development Issues




Page 22                          GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
Page 23   GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
Contents



Letter                                                                                           1


Appendix I                                                                                      26
Comments From the
Department of
Housing and Urban
Development
Appendix II                                                                                     30
Objectives, Scope,
and Methodology
Figures              Figure 1: Appraisers Who Conducted 10 or More Appraisals                    7
                       Between October 1, 1997, and June 30, 1998, and Were Not Field
                       Reviewed
                     Figure 2: Reasons Cited in Field Review Reports for Poor Field             13
                       Review Scores




                     Abbreviations

                     CHUMS     Computerized Homes Underwriting Management System
                     FHA       Federal Housing Administration
                     HOC       homeownership center
                     HUD       Department of Housing and Urban Development


                     Page 24                       GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
Page 25   GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
Appendix I

Comments From the Department of Housing
and Urban Development




             Page 26     GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
Appendix I
Comments From the Department of Housing
and Urban Development




Page 27                            GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
Appendix I
Comments From the Department of Housing
and Urban Development




Page 28                            GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
Appendix I
Comments From the Department of Housing
and Urban Development




Page 29                            GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
Appendix II

Objectives, Scope, and Methodology


              Our objectives were to answer the following questions: (1) How well is the
              Department of Housing and Urban Development (HUD) monitoring the
              performance of the appraisers on its roster and implementing procedures
              for addressing consumers’ complaints about Federal Housing
              Administration (FHA) appraisals? (2) To what extent is HUD holding
              appraisers accountable for poor-quality FHA appraisals? (3) To what extent
              is HUD holding lenders responsible for the quality of the FHA appraisals they
              use? (4) How does HUD ensure that the appraisers on its roster are
              qualified to perform FHA appraisals?

              To assess how well HUD was monitoring the performance of appraisers, we
              reviewed pertinent HUD handbook and policy guidance and discussed this
              information with officials from HUD’s Office of Insured Single-Family
              Housing. We reviewed HUD appraisal and field review data for fiscal year
              1998 and determined the extent to which HUD’s four homeownership
              centers (HOC) field reviewed at least 10 percent of their appraisals, as
              required by HUD. We analyzed field review data in HUD’s Computerized
              Homes Underwriting Management System (CHUMS) to determine for the
              first 9 months of fiscal year 1998 how many appraisers nationwide that
              conducted 10 or more appraisals were subject to at least one field review
              and how many did not have any of their work field reviewed during the
              period. In addition, we reviewed CHUMS data for fiscal year 1998 on the
              median amount of time elapsed between appraisals and the field reviews
              of those appraisals. We interviewed Denver and Philadelphia HOC officials
              about factors affecting their ability to monitor appraisers and oversee field
              review contractors. We also discussed with Real Estate Assessment Center
              officials the planned changes to HUD’s procedures for tracking and
              evaluating the performance of appraisers. In addition, we interviewed
              Denver and Philadelphia HOC officials responsible for handling FHA
              consumer complaints and reviewed consumer complaint logs and files
              maintained by the centers.

              To determine the extent to which HUD was holding appraisers accountable
              for poor-quality appraisals, we reviewed HUD’s guidance regarding
              enforcement actions against poorly performing appraisers. For the period
              from October 1, 1997, through June 30, 1998, we examined the field review
              data in HUD’s CHUMS for the appraisers working in the Philadelphia and
              Denver HOCs’ jurisdictions and identified those appraisers who received
              two or more poor scores (i.e., scores of 1 or 2 on a scale of 1 to 5) in field
              reviews during that period. At the Philadelphia and Denver HOCs, we
              reviewed the files for the 72 and 41 appraisers, respectively, who fell into
              that category. In reviewing these files, we determined (1) whether the poor



              Page 30                          GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
           Appendix II
           Objectives, Scope, and Methodology




           field review scores recorded in CHUMS were documented in field review
           reports and (2) whether the HOCs had prohibited the appraisers from
           conducting further FHA appraisals. We interviewed officials at the Denver
           and Philadelphia HOCs about factors that affected their ability to sanction
           poorly performing appraisers.

           To determine the extent to which HUD was holding lenders responsible for
           the quality of the FHA appraisals they used, we reviewed pertinent
           legislation, HUD regulations, mortgagee letters, and policy guidance. We
           also reviewed correspondence between HUD and mortgage lenders
           regarding specific cases of faulty appraisals. In addition, we interviewed
           officials from HUD’s Denver and Philadelphia HOCs and from its Mortgagee
           Review Board and Enforcement Center about HUD’s authority to hold
           lenders accountable for poor-quality appraisals.

           To determine how HUD ensures that appraisers on FHA’s roster are
           qualified, we reviewed pertinent HUD regulations and policy guidance and
           the minimum licensing criteria established by the Appraiser Qualifications
           Board of the Appraisal Foundation. We interviewed officials from HUD’s
           Office of Single-Family Housing and its Real Estate Assessment Center and
           reviewed revised appraisal guidance being developed by HUD for
           information on the changes planned to HUD’s appraiser eligibility
           requirements. We analyzed appraiser license expiration dates in HUD’s
           CHUMS to determine whether the approximately 31,500 appraisers on FHA’s
           appraiser roster as of August 1998 held current appraiser licenses. We also
           verified the licensing information in CHUMS for the 246 appraisers in the
           Philadelphia and Denver HOCs’ jurisdictions who had received two or more
           poor scores in field reviews during the period from October 1, 1997,
           through June 30, 1998, with licensing data maintained by the Appraisal
           Subcommittee of the Federal Financial Institutions Examination Council.




(385738)   Page 31                              GAO/RCED-99-72 HUD’s Oversight of FHA Appraisals
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