oversight

Implementation Weaknesses Existed in All Major Phases of the FHA Appraiser Review Process

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-04.

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

                                                                         Issue Date
                                                                               September 4, 2008
                                                                         Audit Report Number
                                                                                  2008-LA-0003




TO:           Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing
                 Commissioner, H



FROM:         Joan S. Hobbs, Regional Inspector General for Audit, 9DGA

SUBJECT: Implementation Weaknesses Existed in All Major Phases of the FHA Appraiser
           Review Process


                                         HIGHLIGHTS

    What We Audited and Why

        We audited the U.S. Department of Housing and Urban Development‘s (HUD) appraiser
        review process as part of our annual plan. The audit was proposed as the result of a
        single-family loan origination audit that raised concerns regarding HUD‘s oversight of
        Federal Housing Administration (FHA) appraisers.

        This is the second of two audits covering HUD‘s controls over the appraiser review
        process. The first audit report1 focused on HUD‘s oversight of the FHA appraiser roster
        (see Followup on Prior Audits). This audit report focuses on the appraiser review
        procedures conducted by the homeownership centers and HUD‘s oversight of the
        appraiser review process.




1
 ―HUD Did Not Have Adequate Internal Controls over Its FHA Appraiser Roster,‖ OIG report number 2008-LA-
0002, issued on March 4, 2008.
What We Found


     As implemented, the appraiser review process was not adequate to reliably and
     consistently identify and remedy deficiencies associated with an appraiser. Additionally,
     HUD did not maintain information necessary to assess the effectiveness of its review
     process. More specifically,

              Homeownership centers did not always follow the risk-based targeting review
              procedures,
              An estimated one-third of the desk review reports completed by homeownership
              centers during the audit period contained obvious errors and/or omissions,
              The homeownership centers did not enforce the requirement for interior
              inspections during field reviews, and
              Homeownership centers did not always follow the sanction guidance pertaining
              to an appraiser‘s prior appraisal deficiencies.

What We Recommend


     We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner
     develop and implement adequate oversight and controls over the appraiser review process
     to address the weaknesses identified in this report and to ensure that headquarters
     continuously evaluates the efficiency and effectiveness of the process.

     For each recommendation without a management decision, please respond and provide
     status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us
     copies of any correspondence or directives issued because of the audit.

Auditee’s Response


     We provided HUD with a copy of the report on July 25, 2008, requesting a response by
     August 24, 2008. HUD requested an extension to the response date to September 2,
     2008. However, HUD did not provide a written response to the report by that date,
     therefore, there are no comments from HUD included in this report. At the exit
     conference held on August 7, 2008 HUD generally agreed with the report
     recommendations.




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
   Finding 1: Implementation Weaknesses Existed in All Major Phases of the FHA   6
              Appraiser Review Process

Scope and Methodology                                                            19

Internal Controls                                                                21

Followup on Prior Audits                                                         22

Appendixes
   A. Criteria                                                                   24
   B. Schedule of Desk Review Errors and/or Omissions by Case Number             29




                                            3
                       BACKGROUND AND OBJECTIVES

The Federal Housing Administration (FHA) provides mortgage insurance on loans made by
FHA-approved lenders throughout the United States and its territories. The lenders must use
appraisers on the FHA appraiser roster to perform the required appraisals on properties that will
serve as security for FHA-insured single-family mortgages. FHA insurance reduces a lender‘s
risk because FHA will pay a claim to the lender in the event of a homeowner‘s default.

As of April 2008, FHA had $382 billion in mortgage insurance in force on single-family
properties. FHA‘s Mutual Mortgage Insurance Fund is intended to operate on self-generated
income from mortgage insurance premium proceeds without the need for appropriated funds.
The U.S. Department of Housing and Urban Development‘s (HUD) appraiser review process is a
critical quality control and monitoring mechanism for appraiser performance that helps HUD
ensure the reliability of the appraisals that support FHA financing.


Over time, HUD has changed the way in which it selects FHA appraisers and who monitors the
appraisers‘ performance. Before 1994, HUD maintained an appraiser fee panel, which assigned
appraisers to FHA cases on a rotational basis. By March 1996, HUD required lenders to select
FHA appraisers from a roster of appraisers maintained by HUD. HUD‘s Real Estate Assessment
Center monitored the roster appraisers‘ performance until fiscal year 2002. Since fiscal year
2002, HUD officials at the homeownership centers2 have monitored roster appraisers using
revised procedures now called the appraiser review process. Officials execute and document the
process primarily through an online database that is part of FHA Connection.

HUD‘s appraiser review process consists of the following seven major phases that repeat
quarterly.

                                        Appraiser review process phases



                   1.                    2.                  3.                   4.
                Targeting               Desk                Field               Scoring
                                       review              review


                             5.                     6.                    7.
                         Sanctioning             Appeals               Reporting
                                                 process




2
  HUD executes the FHA insurance program through four homeownership centers. Each homeownership center
insures the loans and oversees the selling of HUD homes for a specified geographic area.


                                                    4
Our audit objectives were to determine whether HUD‘s controls over the appraiser review
process were adequate to identify and remedy deficiencies associated with an appraiser and to
assess the overall effectiveness of the appraiser review process.




                                               5
                                 RESULTS OF AUDIT

Finding 1: Implementation Weaknesses Existed in All Major Phases of
the FHA Appraiser Review Process
Homeownership centers did not fully and consistently implement headquarters‘ guidance in
every major phase of HUD‘s FHA appraiser review process. From the initial procedures used to
target appraisers for review to the imposition of sanctions, our review noted weaknesses at each
major process phase. For example, homeownership center officials did not always perform the
minimum number of required desk reviews for a targeted appraiser. Desk reviews completed by
homeownership officials contained errors and/or omissions for about one-third of the appraisals
reviewed. Field reviewers failed to perform mandatory interior inspections. These weaknesses
occurred because HUD lacked adequate oversight and controls for the appraiser review process.
As a result, the risk of failure to notify or appropriately sanction appraisers whose appraisals are
determined to be deficient increases—even when the appraisers were targeted for review based
upon risk indicators. Consequently, the FHA insurance fund is susceptible to an increased risk
associated with improperly valued properties used to secure FHA-insured mortgages.



 Risk-Based Targeting Review
 Procedures Were Not Always
 Followed


       We could not readily analyze the extent to which the homeownership centers completed
       reviews for all targeted appraisers. However, we did analyze reviews for appraisers
       targeted by headquarters and determined that, although homeownership centers reviewed
       the required number of appraisers, in many instances, officials did not conduct the
       minimum number of desk and field reviews required each quarter for these appraisers.

       Appraiser Targeting

       To select appraisers for review, HUD developed a risk-based approach to identify
       appraisers associated with certain high-risk indicators such as FHA loans that have large
       gifts or early defaults. Every quarter, headquarters provided each homeownership center
       with two lists of appraisers and required them to select 15 appraisers for review. In each
       quarter, the homeownership centers generally reviewed the required 15 appraisers (see
       criterion (1) in appendix A). In addition, every quarter, HUD required each
       homeownership center to select and review an additional 30 appraisers using specific risk
       indicators. Although the homeownership centers maintained a record of each quarter‘s
       targeting, this information was not captured in the appraiser review process database
       system (online database). As a result, we could not readily analyze the extent to which
       reviews were completed for those appraisers. Likewise, without the homeownership



                                                 6
        centers‘ targeting data, HUD cannot evaluate the effectiveness of the risk indicators used
        by the homeownership centers and continue to improve the targeting approach.

        Desk Reviews

        The review procedures required the homeownership centers to perform desk reviews on
        10 appraisal reports for each appraiser and follow up two to five of these with field
        reviews unless the requirements were waived because the appraiser was targeted due to a
        prior sanction or complaint (see criterion (1) in appendix A). We reviewed all of the
        headquarters targeting lists available online for our audit period, which consisted of
        quarterly data covering April 1, 2006, to September 30, 2007. During this period, the
        homeownership centers reviewed one or more FHA appraisals submitted by about 4493
        of the targeted appraisers. Because we could not readily identify appraisers who were not
        subject to the minimum review requirements, we evaluated the homeownership centers‘
        compliance by (1) analyzing the database for overall trends and (2) reviewing randomly
        selected appraisers (see the next section on desk reviews).

        To evaluate overall trends, we compared the headquarters targeting lists to the actual
        appraisers and cases reviewed by the homeownership centers and determined that in 193
        instances, the homeownership centers did not review the minimum number of appraisals
        for these targeted appraisers. The table below summarizes, by homeownership center,
        the 193 instances in which the minimum of 10 appraisals per appraiser selected from the
        headquarters targeting lists were not reviewed.

           Homeownership Number of instances in which the required minimum of 10
                center             appraisals per appraiser was not met
           Atlanta                  49 of 111 appraisers or 44 percent
           Denver                   74 of 112 appraisers or 66 percent
           Philadelphia             62 of 107 appraisers or 58 percent
           Santa Ana                 8 of 119 appraisers or 7 percent
           Total instances         193 of 449 appraisers or 43 percent

        Field Reviews

        We reviewed headquarters gifts and concessions targeting lists further by comparing
        them to the actual number of field reviews performed per appraiser and determined that
        in 109 instances, the homeownership centers did not perform the minimum number of
        field reviews per targeted appraiser. The table below summarizes, by homeownership
        center, the 109 instances in which the minimum of two field reviews per appraiser
        selected from the headquarters targeting lists was not conducted.




3
  The analysis excluded targeted appraisers with fewer than 10 FHA appraisals identified by headquarters for
review.


                                                         7
            Homeownership            Number of instances in which the required minimum of
                 center                  two field reviews per appraiser was not met
            Atlanta                            48 of 60 appraisers or 80 percent
            Denver                             25 of 59 appraisers or 42 percent
            Philadelphia                       13 of 58 appraisers or 22 percent
            Santa Ana                          23 of 59 appraisers or 39 percent
            Total instances                 109 of 2364 appraisers or 46 percent

         To the extent the homeownership centers did not desk or field review the minimum
         number of appraisals, each targeted appraiser may have received a less comprehensive
         evaluation than intended by headquarters. A HUD official verified that there was no
         means to ensure that the homeownership centers met the appraiser and appraisal targeting
         review requirements each quarter without an in-depth analysis. Officials at one
         homeownership center informed us that not all of the required field reviews were
         performed due to resource or other constraints. Since the homeownership centers did not
         fully implement the targeting review procedures as prescribed, HUD could not accurately
         assess the effectiveness of its targeting review procedures within the appraiser review
         process.

    Desk Reviews Contained Errors
    and/or Omissions

         At least 37.5 percent of the homeownership centers‘ desk reviews contained clearly
         identifiable errors and/or omissions. We randomly sampled 64 of 18,159 desk reviews
         completed for the two-year audit period and found 24 instances in which the
         homeownership centers‘ desk review checklists contained one or more obvious errors
         and/or omissions (see the Scope and Methodology for a description of the sampling plan).
         The following numbers of deficiencies per desk review were identified5:

                    12 reviews had one or two errors and/or omissions.
                    10 reviews had three to five errors and/or omissions.
                    Two reviews had six or more errors and/or omissions.

         The following are examples of the desk review checklist questions for which we
         disagreed with the reviewer‘s yes/no answer. An Inspector General state-certified

4
  Of the 449 appraisers, 213 were not subject to the field review requirements because headquarters targeted them
based on an algorithm. The algorithm relies on three risk-based indicators: (1) early loan default, (2) large claim
amounts, and (3) severity of net dollar loss to the FHA insurance fund.
5
  We identified the errors and/or omissions by using the review checklists completed by the homeownership centers
and FHA appraisal packages (the appraisal package includes the uniform residential appraisal report, attachments,
and addendums) used by the homeownership center staff to complete their desk reviews. We then compared our
results to the responses on homeownership centers‘ checklists. Although the appraiser review process used the
checklist results to identify appraisals that needed a field review evaluation, we did not attempt to agree or disagree
with the desk reviewer‘s overall conclusion in that regard. To be conservative, we instead focused on the questions
that a reviewer could answer with the most objectivity (we excluded the checklist questions that were subjective in
nature; for example, ―Excessive number of adjustments‖).


                                                           8
     appraiser verified the errors and/or omissions. Appendix B contains the complete list of
     errors and/or omissions identified for the 24 cases.

              ―Comparable(s) is/are not within defined neighborhood boundaries and the
              appraiser does not provide adequate explanation.‖

              ―Photos and/or maps are either omitted or are of poor quality or the building
              sketch is insufficient.‖

              ―Appraiser indicates generic descriptions (i.e. ―equal,‖ ―similar,‖ ―same,‖
              ―typical‖) as opposed to specific descriptions required for items listed in the
              sales grid.‖

     Based on the 37.5 percent (24 of 64) deficiency rate of desk reviews, an estimated 6,810
     desk reviews performed by HUD‘s homeownership centers for the two-year audit period
     may have had similar deficiencies. Such a high deficiency rate raises questions about the
     efficiency/effectiveness of the checklist procedures as they were implemented.

     Ineffective desk reviews may result in the homeownership centers‘ failure to impose
     needed actions/sanctions. In four of the sampled cases, the desk reviewer failed to
     identify errors and/or omissions, and no field reviews were performed during the review
     cycle for these appraisers. (All four appraisers were targeted for risk indicators and were
     subject to the minimum field review requirement.) According to the guidance for the
     appraiser review process, the ―focus of the desk reviews is to identify deficiencies in the
     process and format of the reported data….If the desk reviewer concludes that the
     appraisal report is inconsistent or unacceptable then a field review is warranted.‖
     Additionally, officials confirmed that the purpose of performing desk reviews on 10
     appraisals for each appraiser is to identify trends and select the most deficient appraisals
     for field review. Any sanctions were generally based on cases that involved field
     reviews, and sanctions were rarely based on desk reviews alone. By failing to properly
     implement appraiser review procedures for these four cases, the homeownership center(s)
     may have missed opportunities to notify the appraisers of the problems indicated by the
     desk reviews and possibly impose needed sanctions. HUD had retargeted two of these
     appraisers for the same risk indicators in quarters that postdated our audit period.

The Field Review Requirement
for Interior Inspections Was
Not Enforced

     The homeownership centers did not enforce the requirements for mandatory interior field
     review inspections. According to HUD‘s guidance, the field review process entailed
     inspections of the subject property‘s interior and exterior. Generally, the homeownership
     centers contracted out the field reviews, and according to an appendix in HUD‘s
     guidance, an interior inspection is a mandatory part of the field review. However, the
     supplemental guidance seems to contradict the requirement by stating ―[i]t is anticipated


                                              9
         that HUD will ask the contractor to conduct interior property reviews of 100% of the
         subject properties assigned for review.‖ (See criterion 3 in appendix A.) Based on an
         analysis of all field reviews performed,6 the rate of exterior-only field review inspections
         for the audit period, by homeownership center, ranged from 30 to 73 percent. Officials at
         two homeownership centers maintained that, despite the written guidance, interior field
         review inspections were not required.

                           Homeownership center            Rate of exterior- only
                                                            reviews performed
                         Atlanta                                 45 percent
                         Denver                                  35 percent
                         Philadelphia                            73 percent
                         Santa Ana                               30 percent

         The homeownership centers‘ quality control reviews of the field review contractors‘
         performance also reported noncompliance with the interior inspection requirements. In
         selected quality control reviews we obtained, HUD noted issues regarding the interior
         field review inspections. In one instance, the reviewing official stated, ―[o]ne of the most
         serious issues is claiming to have done an interior review when the appraiser had not.
         One of the homeowners stated flatly that [nobody] contacted him, or his wife, to request
         permission to do an interior inspection.‖ In another case, under a different
         homeownership center, the reviewing official noted that in some cases the contractor
         charged for the interior field review, when exterior-only reviews had been conducted.
         Accordingly, HUD‘s quality control results indicated that the exterior field review rates
         noted above may have underestimated the extent to which field reviews were not
         performed.

         If HUD‘s field reviewer or the contractor does not conduct an interior field inspection,
         issues that may affect the continued marketability of the property will remain unknown to
         HUD. HUD‘s guidance (see criterion 3 in appendix A) discussed the importance of the
         interior field review inspections. Specifically, ―[t]he interior review shall include
         examination for any unusual items or serious oversights by the authorized appraiser of
         noticeable defects in the property, which could affect the health and safety of the occupants
         or continued marketability of the property.‖

    Appraisal Field Review Reports
    Were Not Consistently Scored


         Homeownership center officials did not consistently score the appraisal review reports
         submitted by the field reviewers. According to guidance for the appraisal review process,
         after field reviewers electronically submitted their results, a qualified official at the
         homeownership center compared the original appraisal to the field review report and
6
 We analyzed field review cases from the universe of desk reviews performed from October 1, 2005, to September
30, 2007.


                                                      10
         scored the report based upon specific instructions. Using the appraisals selected in our
         statistical random sample for analysis of the desk review process, we identified field
         reviews associated with the same appraisers and compared the scores awarded to the
         guidance. We performed a limited review and did not fully assess whether the rater
         scored the overall appraisal review report appropriately because we did not have the FHA
         case files available to compare the field reviewer comments to the original appraisals.
         However, we found the following inconsistencies in the scoring, which may indicate
         more widespread problems. For example,

                    Scoring instructions for one question, regarding whether the comparables were
                    truly comparable to the subject property, prescribed that one point should be
                    assessed for each comparable that was not: truly comparable, representative of
                    subject market, and best as of effective date of appraisal. However, two field
                    review reports had identical responses, yet raters assessed a score of three points
                    to one case and two points to the other.

                    In another appraisal review report, the field reviewer comments were as
                    follows: ―Insufficient adjustment on Sale #1 for detached guest house or
                    apartment; Condition adjustment needed on Sale #3 for complete remodel;
                    Adjustment needed on Sales #1 and #3 for VIEW due to the inferior subject
                    location along a thru-street.‖ The scoring methodology said to add one point for
                    each condition not met for each comparable (1, 2, and 3). However, the rater
                    assessed a total of one point for all of the comments.

         Inconsistent scoring of the field review reports could lead to inconsistent disciplinary
         actions/sanctions. According to headquarters guidance, the quantified scoring
         methodology was developed to ensure uniformity (inter- and intra-homeownership
         center) in recommending actions taken against appraisers. The guidance states further
         that ―[t]his uniformity will ultimately lead to a fair and defendable appraisal review
         process for the appraisers on the FHA roster.‖ To the extent to which raters failed to
         follow the scoring methodology, they potentially undermined the purpose of HUD‘s
         quantified approach.

    Sanctioning Guidance for Prior
    Deficiencies Was Not Always
    Followed

         The homeownership center officials did not always incorporate HUD‘s guidance into
         their appraiser-sanctioning decisions. HUD‘s guidance states, ―[a]long with scoring
         individual appraisals, the Rater will also be responsible for monitoring the past
         performance of the appraiser….The Rater will take into account any recommended or
         imposed actions within the last 12 months.‖ Specifically, raters should choose the most
         severe action recommended for the appraiser within the past 12 months.7 Also, when an
7
  The four primary actions/sanctions that can be imposed on an appraiser are a notice of deficiency, education,
removal, or removal with education.


                                                         11
     appraiser has received three or more recommendations for notices of deficiency within
    the past 12 months, the rater should escalate the sanction to education. Likewise, three or
    more recommendations for education should be escalated to a removal.

    Our analyses of the two years of data provided by HUD showed many instances in which
    sanctioning guidance was not followed. For the 2,665 appraisers reviewed within the
    audit period, 491 (18 percent) had one or more desk or field reviews that resulted in a
    recommended action/sanction. We analyzed the online database history of recommended
    and imposed actions/sanctions for the 491 appraisers and found the following instances in
    which the raters did not follow the sanctioning guidance:

             For 132 appraisers, the homeownership center officials did not impose the most
             severe action/sanction recommendation in the past 12 months.

             For 52 appraisers, the homeownership center officials did not escalate an
             action/sanction when three or more appraisals had the same recommendation in
             the past 12 months.

    Failure to consistently escalate sanctions for repeated appraisal deficiencies reduced the
    credibility of the appraiser review process. According to HUD‘s guidance on
    management control, when program participants do not comply with recommended
    actions, appropriate administrative or programmatic sanctions should be applied.
    Sanctions are used to establish the credibility for enforcing the monitoring system.
    Without escalation and enforcement, appraisers have less incentive to avoid a repeat
    sanction. If appraisers who remained on FHA‘s roster failed to correct their deficient
    practices, then HUD failed to reduce the risk these appraisers posed to the insurance fund.

Appeal Timeframes Were
Inconsistent

    Officials allowed appraisers varying timeframes in which to appeal sanctions and/or
    complete corrective actions. A complete review of the appeals process was beyond the
    scope of our review. However, we performed a limited analysis to evaluate compliance
    with guidance regarding timeframes allotted for completion of corrective actions or
    appeals. We reviewed all 76 instances within our audit period in which, upon appeal,
    officials reduced recommended sanctions for education, removal, or removal with
    education (see Scope and Methodology). We noted the following inconsistencies that
    occurred among and within the homeownership centers.

             When the homeownership center officials issued an education sanction to an
             appraiser, HUD‘s guidance stipulated that the training must occur within 60
             days of the date of the sanction letter. However, the length of time allowed for
             the appraiser to complete his or her education varied from one to four months as
             follows:




                                            12
                        o   Seven appraisers were given one month,
                        o   13 were given two months,
                        o   17 were given three months, and
                        o   Two appraisers were given four months.8

                    For the 76 cases examined, officials granted the appeal request after the appeal
                    deadline in 21 cases. In all cases, the appraisers sent in their appeal request
                    after the appeal deadline date. The distribution of appeals by homeownership
                    center was as follows:

                        o   Atlanta:         one
                        o   Denver:          19
                        o   Philadelphia:    zero
                        o   Santa Ana:       one

          In addition, it appeared that officials inconsistently updated the database fields for the
          estimated deadline date and the action deadline when they granted extensions. As a
          result, it was not possible to perform a reliable analysis of how often (or for how long)
          officials granted such extensions.

          Similar to following guidance regarding the escalation of actions/sanctions for repeated
          offenses (discussed above), compliance with timeframes allotted for disciplinary actions
          helps to build credibility into the monitoring process. In some cases, good reasons may
          exist to extend timeframes. However, tracking such extensions could provide
          management with an opportunity to identify problems or improve the sanctioning and
          appeals process.

    Online Database System
    Reports Were Limited

          HUD could not readily obtain and analyze pertinent data required to monitor the
          homeownership centers‘ implementation of the appraiser review process. HUD officials
          confirmed our observations that queries were not available in the online databases9 to
          verify whether the homeownership center officials complied with prescribed review
          policies, such as reviewing the minimum number of appraisers targeted by headquarters
          each quarter. To verify that the homeownership centers complied with the review
          policies, officials would have needed to download the information on a case-by-case or
          appraiser-by-appraiser basis.

          Summary information and reports on review process implementation are necessary for
          management to monitor efficiency and effectiveness and to propose improvements to the
          process when needed. For example, officials could evaluate the effectiveness of the


8
    Data were missing for 3 of the 42 cases reviewed.
9
    FHA Connection or Computerized Homes Underwriting Management Systems.


                                                    13
          targeting process by comparing summary information regarding the reasons appraisers
          were selected for review with the resulting quarterly actions/sanctions.

     Field Review Contractor
     Quality Control Guidance Was
     Limited

          HUD‘s quality control guidance pertaining to its field review contractors lacked specific
          instructions regarding follow-through and coordination with its contracting officers. In
          response to a U.S. Government Accountability Office recommendation (see Followup on
          Prior Audits section of the report), HUD issued guidance10 in 2006 for on-site monitoring
          of field review contractor performance. Generally, for a quarterly review cycle, each
          homeownership center must review two case file reviews completed by one contract
          appraiser. The two-page guidance requires summary reports to headquarters ―for
          informational purposes only‖ and states that the report format, which is a summary of
          findings, must include (a) the number of contractors reviewed and (b) the result of the
          review. The guidance does not ensure that any deficiencies will be communicated to the
          contractor or to the government contract representative (responsible for oversight of the
          contractor‘s performance). The guidance instead states, ―HUD staff will document any
          pattern of problems, instances of significant non-compliance, or poor performance, which
          may serve as the basis for termination of the contractor, when warranted,‖ but does not
          designate the official(s) responsible for tracking the information.

          For each homeownership center, we performed limited reviews of two contractor quality
          control reviews that occurred within our audit period and noted the following:

                   Three of the four homeownership centers did not provide a reason for the
                   quality control contractor reviews (although the guidance required
                   homeownership centers to maintain a record of the data used to target the
                   contractors).

                   One staff reviewer provided a formal contractor report to the homeownership
                   center chief indicating trends in wrong photographs, wrong site and property
                   descriptions, and inaccurate data for comparables in two contractor quarterly
                   reviews. The formal report contained findings and an explanation that the
                   appraisal review panel voted to mitigate to an education sanction instead of a
                   removal. However, we were unable to verify in the online database or in the
                   quality control documents whether this sanction was imposed.

                   One staff reviewer provided a formal memorandum to the homeownership
                   center chief and noted deficiencies relating to data verification on the subject,
                   inadequate comparables, failure to analyze and properly adjust comparables,
                   failure to confirm sales data and verification source, and failure to address
10
 On-Site Monitoring and Oversight of Federal Housing Administration (FHA) Appraiser Field Review
Contractors. Effective March 1, 2006.


                                                    14
                   downpayment assistance and the impact it had on sales price of subject and
                   comparables. According to the quality control review report, the
                   homeownership center removed the appraiser from the roster and then rescinded
                   the removal after accepting a late appeal from the appraiser. However, we were
                   unable to verify this through the FHA Connection appraiser review function or
                   the quality control documents.

          The quality control reports and supporting documentation did not show how the
          homeownership centers reported or otherwise addressed these significant deficiencies.
          Resolution of problems identified during quality control monitoring is a key requirement
          in the Standards for Internal Control in the Federal Government.11 Without tracking
          followup actions/sanctions, the contractor monitoring process cannot be effective and
          credible.

     Headquarters’ Oversight Was
     Inadequate

          Headquarters‘ oversight of the appraiser review process was inadequate to identify and
          track noncompliance with process guidance or to evaluate the efficiency and
          effectiveness of the process, for example, by comparing outcomes (actions and sanctions)
          to the homeownership centers‘ implementation of targeting and review methodologies
          over time. The appraiser review process is HUD‘s critical control over the quality of
          work performed by FHA roster appraisers. According to the Office of Management and
          Budget, ―[m]anagement is responsible for developing and maintaining effective internal
          control. Effective internal control provides assurance that significant weaknesses in the
          design operation of internal control, that could adversely affect the agency‘s ability to
          meet its objectives, would be prevented in a timely manner….Continuous monitoring and
          testing should help to identify poorly designed or ineffective controls and should be
          reported upon periodically. Management is then responsible for redesigning or
          improving upon those controls.‖ We identified the following significant areas in which
          HUD failed to provide appropriate oversight of the appraiser review process or establish
          internal controls to ensure that the process was properly implemented.

          Headquarters Did Not Evaluate Data or Reports and Provide Feedback to
          Homeownership Centers

          Officials at all four homeownership centers informed us that they received no feedback
          from headquarters regarding their performance or the effectiveness of the appraiser
          review process. Generally the only reports they submitted to headquarters were the
          quarterly summaries containing (1) statistics regarding the targeting quotas and the
          number of sanctions each quarter and (2) basic information on the homeownership
          centers‘ quality control results on the field review contractor(s). The information needed
          to gauge the homeownership centers‘ compliance with HUD‘s review process

11
  U.S. Government Accountability Office/Accounting and Information Management Division (GAO/AIMD)-00-
21.3.1, page 20.


                                                  15
        requirements was neither fully reported by the centers nor readily obtainable from the
        online database, as discussed above.

        In addition, headquarters officials apparently failed to evaluate the accuracy of summary
        reports that were available online or otherwise note significant differences in the statistics
        reported by the homeownership centers. For example, they failed to question why online
        summary reports showed that, compared to the other homeownership centers,
        Philadelphia had performed almost twice as many desk reviews.


                                         Number of appraisers desk reviewed, by homeownership
                                           center, from October 1, 2005, to September 30, 2007


                                    Santa Ana
            Homeownership center




                                   Philadelphia



                                        Denver



                                       Atlanta


                                                  0   200     400        600       800      1000   1200
                                                            Number of appraisers reviewed



        During our review, the Philadelphia homeownership center confirmed that, until recently,
        their staff had erroneously entered reviews from the postendorsement technical review
        process as part of the appraiser review process, thus inflating the number of appraisers
        that were desk reviewed. After this error had occurred for more than a year, Philadelphia
        homeownership center officials noticed that the number of appraisers reviewed in their
        summary reports was much higher than the numbers reported by the other
        homeownership centers. Officials stated that around April 2008, they changed their
        procedures to exclude postendorsement technical reviews unless the appraisers were later
        targeted for the appraiser review process.12 Headquarters failed to question the
        homeownership center regarding the significant discrepancies in its quarterly numbers.
        Notably, if headquarters had used the inflated summary reports to evaluate the efficiency
        and effectiveness of the appraiser review process, its conclusions would likely have been
        invalid.13



12
   We did not verify whether the Philadelphia homeownership center had changed its reporting method because the
change purportedly occurred in about April of 2008, which was after our audit period.
13
   We estimated the number of appraisal reviews improperly included in the database and, where appropriate,
excluded these from our data analyses.


                                                                    16
          Written Policies and Procedures Were Out of Date

          The policies and procedures available to the homeownership center officials were
          outdated. For instance, HUD Handbook 4150.2, chapter 6, Appraisal and Appraiser
          Monitoring, still included procedures that referred to Real Estate Assessment Center
          performance although that organization had not been part of the process since 2002.
          Additionally, headquarters officials noted that HUD guidance available to the
          homeownership center officials excluded the most recent changes and related to the old
          system. According to the director, a workgroup was recently assembled to create one
          comprehensive appraiser review process guide.

          Headquarters Did Not Systematically Evaluate the Efficiency and Effectiveness of the
          Appraiser Review Process

          Headquarters officials did not provide data to demonstrate that they had developed and
          evaluated information—such as trend analyses, correlations between targeting methods
          and sanctions, or data comparisons among homeownership centers—that could have been
          used to find implementation problems with the appraisal review process or to identify
          best practices. While it appeared that the online database incorporated many beneficial
          features, it lacked controls to monitor compliance with process requirements.
          Specifically, as discussed above, the online database system did not readily provide
          reports that could have been used to monitor how closely the homeownership centers
          followed the targeting and review guidelines.


     Conclusion


          Our review noted weaknesses at each major phase of the appraiser review process. For
          each phase, we noted problems such as inadequate or incomplete HUD guidance, weak
          quality controls over implementation of review procedures, and inconsistent application
          of rating standards and sanctioning timeframes. HUD‘s Handbook on Valuation Analysis
          for Home Mortgage Insurance14 states that the [appraisal/appraiser] ―review process is a
          critical quality control and performance monitoring mechanism for HUD….By
          performing statistical analysis as well as field reviews, HUD maintains the capabilities to
          broadly track its portfolio and investigate it in greater depth. The reviews will be used to
          determine the reliability of the appraisal supporting FHA financing as well as the
          performance of the appraiser.‖ However, as implemented, the appraiser review process
          was not adequate to reliably and consistently identify and remedy deficiencies associated
          with an appraiser. Additionally, HUD did not maintain information necessary to assess
          the effectiveness of its review process.



14
 Handbook 4150.2, Valuation Analysis for Home Mortgage Insurance for Single Family One- to Four- Unit
Dwellings, sections 6-0 and 6-3.



                                                    17
    These weaknesses occurred because headquarters lacked adequate oversight and control
    of the appraiser review process. As a result, the risk of failure to notify or appropriately
    sanction appraisers whose FHA appraisals are determined to be deficient is increased.
    Consequently, the FHA insurance fund is susceptible to an increased risk associated with
    improperly valued properties used to secure FHA-insured mortgages.

Recommendations


    We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner
    implement adequate oversight and controls over the appraiser review process by

    1A.    Developing and implementing a written quality control plan for the appraiser
           review process that includes procedures to address the implementation
           weaknesses identified in this report.

    1B.    Developing and implementing a systematic process to evaluate the efficiency and
           effectiveness of the appraiser review process on a regular and recurring basis.

    1C.    Updating and consolidating the policies and procedures for the appraiser review
           process.

    1D.    Evaluating the appraiser review process data and reports on a regular and
           recurring basis.

    1E.    Providing feedback to the homeownership centers regarding their implementation
           of the appraiser review process to promote consistency and best practices.




                                             18
                         SCOPE AND METHODOLOGY

We performed the audit work between January 14 and June 17, 2008. Our review generally
covered appraiser reviews conducted from October 1, 2005, through September 30, 2007. We
focused on HUD‘s implementation of its appraiser review process and whether homeownership
center officials could adequately identify appraisal deficiencies and issue appropriate remedies to
the associated appraiser. We were unable to assess the effectiveness of the process at the
department level because of data constraints.

To accomplish our audit objective, we

           Reviewed relevant HUD regulations, Office of Management and Budget circulars,
           and other pertinent information;

           Reviewed HUD‘s policies and procedures associated with the appraiser review
           process;

           Interviewed appropriate HUD personnel at headquarters and the homeownership
           centers to obtain an understanding of the appraisal review procedures and controls;

           Reviewed data and other information provided by HUD headquarters and the
           homeownership centers;

           Reviewed a random sample of desk reviews to evaluate whether desk review
           checklists were correctly and completely completed; and

           Reviewed appraiser review process data contained in FHA Connection.

Headquarters officials provided a database of FHA case numbers and associated appraiser review
process data for all desk reviews completed by the four homeownership centers for the audit
period (covering eight quarterly appraiser review cycles starting October 1, 2005, and ending
September 30, 2007). This database contained 19,304 desk review records. We later estimated
that officials improperly included a number of cases that did not go through the appraiser review
process. Based on our sample testing described below, we estimated that a universe of 18,159
desk reviews were applicable to our desk review analysis.

To review compliance with risk-based targeting review procedures, we obtained headquarters
targeting lists for the six quarters that were available in the online database for our audit period—
April 1, 2006, to September 30, 2007. We then analyzed the headquarters database records
associated with appraisers who were subject to the minimum desk review and, when applicable,
field review requirements.

For our analysis of desk reviews, we selected a random attribute sample of 64 desk review cases
from the universe of 18,159 in the headquarters database of desk reviews. We reviewed HUD‘s
desk review checklists as described in the report and determined that checklists for 24 of the


                                                 19
sample cases contained one or more errors and/or omissions regarding objective information
required in an FHA appraisal (see appendix B for a schedule of desk review errors and/or
omissions by case number). An Inspector General state-certified appraiser verified our
conclusions. Based on the 24 desk reviews that contained one or more errors or omissions, we
computed an attribute error rate of 37.5 percent. We projected this error rate to the universe and
estimated that 6,180 desk review checklists for the two-year period contained similar errors
and/or omissions. The projected results have a confidence level of 90 percent and a sampling
error rate of 9.91 percent.

We completed a full review for 26 of the 64 desk review cases in our sample. We prioritized our
reviews on the premise that if a desk review proceeded to field review, there was another
opportunity for the appraiser to be notified/sanctioned for the appraisal‘s deficiencies. However,
if a desk review contained errors and/or omissions and did not proceed to field review, HUD
generally did not have the additional opportunity to sanction the appraiser for those items.
Therefore, deficient desk reviews with no field review posed the greatest risk that the appraiser
would not be notified of the problems and continue to produce defective FHA appraisals.

For the same 26 sample cases, we analyzed field review, reselection, and scoring information for
the associated appraiser. We did not project any statistical sample result to the universe of
appraisers because, although chosen at random, each appraiser did not have an equal chance of
being selected (some appraisers had as many as 28 desk reviews in the universe, and many had
only one).

To analyze data related to sanctions and appeals, we used information in HUD‘s online database
for the period October 1, 2005, to September 30, 2007, because the database of desk reviews
provided by headquarters did not contain information needed to conduct the analysis.

We performed our review in accordance with generally accepted government auditing standards.




                                                20
                              INTERNAL CONTROLS

Internal control is an integral component of an organization‘s management that provides
reasonable assurance that the following objectives are being achieved:

       Effectiveness and efficiency of operations,
       Reliability of financial reporting, and
       Compliance with applicable laws and regulations.

Internal controls relate to management‘s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
       We determined the following internal controls were relevant to our audit objectives:

                Effectiveness of operations and

                Compliance with applicable laws and regulations.

       We assessed the relevant controls identified above.

       A significant weakness exists if management controls do not provide reasonable assurance
       that the process for planning, organizing, directing, and controlling program operations will
       meet the organization‘s objectives.


 Significant Weaknesses


       Based on our review, we believe the following item is a significant weakness:

                HUD‘s lack of quality control over the implementation of its appraiser review
                process.




                                                21
                     FOLLOWUP ON PRIOR AUDITS


HUD Did Not Have Adequate
Internal Controls over Its FHA
Appraiser Roster (2008-LA-0002)

     The U.S. Department of Housing and Urban Development (HUD) Office of Inspector
     General (OIG) for Audit recently issued the audit report entitled ―HUD Did Not Have
     Adequate Internal Controls over Its FHA Appraiser Roster,‖ (2008-LA-0002). This
     report reviewed the FHA appraiser roster to determine whether HUD‘s controls over the
     roster were adequate to ensure that only qualified/eligible appraisers were placed on the
     roster and whether the oversight and maintenance of the roster were sufficient to ensure
     that only currently eligible appraisers remained on the roster. The report noted
     significant weaknesses in HUD‘s internal controls used to maintain the roster and
     recommended that HUD implement stronger internal controls to ensure that only eligible
     appraisers are placed on its roster and that oversight and maintenance of the roster ensure
     that only eligible appraisers remain on the roster. At this time, HUD plans to address the
     recommendations, and our current audit excluded any followup review of HUD‘s
     appraiser roster.

Single-Family Housing: HUD’s
Risk-Based Oversight of
Appraisers Could Be Enhanced
(GAO 05-14)

     In 2005 the U.S. Government Accountability Office (GAO) issued the report entitled
     ―Single-Family Housing: HUD‘s Risk-Based Oversight of Appraisers Could Be
     Enhanced,‖ (GAO 05-14). GAO conducted the review as a followup to its 1999 report
     on the need for improvements in HUD‘s oversight of appraisers, which has historically
     been a challenge for HUD. 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,‖ GAO recommended that the Secretary of HUD 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;

         Consider a requirement to include, when targeting appraisers for review, those
         appraisers who have recently completed a sanction period to ensure that these
         appraisers have corrected their relevant deficiencies;

         Maintain the historical information, particularly early loan default information, used
         to target appraisers for review to ensure that the homeownership centers target and
         review appraisers based on the criteria in HUD guidance; and


                                             22
   Implement a cost-effective field review contractor oversight process that includes on-
   site monitoring.

OIG‘s evaluation of HUD‘s Corrective Actions Taken in Response to GAO‘s
Recommendations

   HUD had taken steps to strengthen the process of placing appraisers on its roster;
   however, as noted above, OIG recently completed a review that found significant
   control weaknesses persisted. OIG‘s evaluation of HUD‘s corrective actions remains
   in progress, and was not part of our current review.

   On May 31, 2005, headquarters issued a memorandum to homeownership center
   officials that contained new procedures for targeting FHA roster appraisers ―designed
   to improve upon the successful risk-based targeting methodology implemented in FY
   [fiscal year] 2002 and to respond to GAO audit recommendations.‖ The ―Revised
   Procedures for Targeting Federal Housing Administrations (FHA) Roster Appraisers
   for Review‖ were effective July 1, 2005. This revised targeting policy included a
   provision for homeownership center officials to generate targeting lists based, in part,
   on previously sanctioned appraisers. Our current review looked at compliance with
   HUD‘s review requirements for targeted appraisers but did not evaluate the
   effectiveness of the revised targeting policy.

   The above-mentioned ―Revised Procedures for Targeting Federal Housing
   Administrations (FHA) Roster Appraisers for Review‖ require homeownership center
   officials to maintain permanent records of the data used to target appraisers each
   quarter, listing of appraisers targeted for review, and criteria under which each
   appraiser was identified for review. During our audit, we did not find any instances
   in which the homeownership centers deviated from this policy. Additionally, the
   online system maintained headquarters‘ targeting lists for the most recent nine
   quarters. However, the online system did not capture the homeownership centers‘
   appraiser and appraisal quarterly target lists.

   In the ―Revised Procedures for Targeting Federal Housing Administrations (FHA)
   Roster Appraisers for Review‖ policy, effective July 1, 2005, and similarly in the
   ―Updated Revised Procedures for On-Site Monitoring and Oversight of Federal
   Housing Administration (FHA) Appraiser Field Review Contractors‖ policy,
   effective March 1, 2006, HUD outlines procedures for contractor oversight. In short,
   officials at each homeownership center will review two FHA contractor field reviews
   for at least one field review contractor per quarter, subject to the availability of
   adequate resources. Our audit included a limited review of the homeownership
   centers‘ compliance with the new procedures.




                                        23
                                     APPENDIXES

Appendix A

                                       CRITERIA
1. Internal HUD memorandum, ―Revised Procedures for Targeting Federal Housing
Administration (FHA) Roster Appraisers for Review,‖ effective July 1, 2005.

       Targeting Threshold

       The homeownership centers are to follow the requirements set forth below as funding
       allows:

              Select 15 appraisers from the headquarters-generated targeting lists.

              Select 30 additional appraisers based on risk-based indicators.

       Review Procedures

              ―For each appraiser identified for review, the HOC [home ownership center] must
              complete desk reviews of 10 cases except for appraisers associated with prior
              sanctions and complaints.‖

              ―For each targeted appraiser, the HOC must perform on-site reviews of 2 to 5
              cases except for appraisers associated with prior sanctions, complaints, and
              appraiser algorithm.‖

2.Internal HUD memorandum, ―Revised Procedures for Targeting Federal Housing
Administration (FHA) Roster Appraisers for Review,‖ effective July 1, 2005, and similarly
―Updated Revised Procedures for On-site Monitoring and Oversight of Federal Housing
Administration (FHA) Appraiser Field Review Contractors,‖ effective March 1, 2006, set forth
the requirements for the contractor oversight of the field reviewers.

       Targeting Threshold

              Each homeownership center must review at least one contractor per quarter.

              Each homeownership center will review a minimum of four contractors per year,
              subject to the availability of adequate resources to perform the review function as
              specified.




                                               24
       Review Procedures

              Upon receipt of the completed review documents from the contractor, the
              Technical Support Branch Chief will select two of the appraisal field review cases
              performed by one contractor to evaluate the contractor‘s performance.

              HUD staff will document any pattern or problems, instances of significant
              noncompliance, or poor performance, which may serve as the basis for
              termination of the contractor, when warranted.

       Reporting Requirements (specific to the memorandum, effective March 1, 2006)

       ―These reports are for informational purposes only. The report format, which is a
       summary of findings, must include (a) the number of contractors reviewed and (b) the
       results of the review.‖

3.Internal Desktop Guide (Appraiser Review Process)

       III. Review Process

          Desk Reviews

          ―The Desk Reviewer analyzes the appraisal package. The focus of the desk review is
          to identify deficiencies in the process and format of the reported data. Ultimately, it
          is incumbent upon the Desk Reviewer to carefully analyze the appraisal report for
          reasonable and logical conclusions of value. The Desk Reviewer will determine if the
          appraisal data is reported consistent with the requirements set forth by HUD
          Handbook 4150.2 and USPAP (Uniform Standards of Professional Appraisal
          Practice). The comprehensive valuation package (CVP) must also be reviewed for
          completeness and compliance with the cited guidelines. If the desk reviewer
          concludes that the appraisal report is inconsistent or unacceptable then a field review
          is warranted.‖

          Field Reviews

          ―The value, process, data reported and ultimate conclusion as to the acceptability of
          the appraisal must be reported in an unbiased manner. The review process involves
          inspection of the subject‘s interior and exterior. It is a mandatory requirement per the
          Statement of Work (SOW) that an interior inspection is conducted. (See SOW in
          Appendix B, Attachment 2.) This inspection is completed in a way that allows the
          reporting of any readily observable defective conditions that do not meet the
          Minimum Property Standards (MPS) or HUD Handbook 4905.l.‖




                                               25
V. Scoring and Rating Methodology

―To quantify the information in the ARR [appraisal review report], a point value was
assigned to each element of each question. A summary of the points/critical elements
assigned to each scored question off the ARR form can be found in Appendix C,
Attachment 1. The information was quantified to ensure uniformity (inter and intra
HOC) in recommending actions taken against appraisers. This uniformity will ultimately
lead to a fair and defendable appraisal review process for the appraisers on the FHA
roster. This scoring method provides the rater with a systematic way of thoroughly
examining the appraisal and the corresponding field review. The results from the scoring
model give the Rater a recommended action to pursue.‖

   Scoring Several Appraisals for One Appraiser

   ―Along with scoring individual appraisals, the Rater will also be responsible for
   monitoring the past performance of the appraiser. Under our current targeting system
   several appraisals will be targeted for one appraiser. The Rater will take into account
   any recommended or imposed actions within the last 12 months. The Rater can check
   in CHUMS [Computerized Homes Underwriting Management Systems] and the
   access database to determine if actions were imposed against an appraiser. If an
   appraiser has 3 or more appraisals that scored a recommended ‗NOD‘ [notice of
   deficiency] in the last 12 months, then an ‗Education‘ action is recommended. If an
   individual appraiser has 3 or more appraisals that scored a recommended ‗Education‘
   in the last 12 months, then a ‗Removal‘ action is recommended. The Rater should
   choose the most severe action recommended. If 5 field reviews were performed on
   one appraiser within the past 12 months and 1 scored a recommended ‗Removal‘ and
   the other 4 scored a recommended ‗NOD,‘ the outcome would be a recommended
   ‗Removal.‘ If 3 field reviews were performed on one appraiser within the past 12
   months and all 3 scored a recommended ‗NOD,‘ then the outcome would be a
   recommended ‗Education.‘ If 4 field reviews were performed on one appraiser
   within the last 12 months and 2 scored a recommended ‗NOD‘ and 2 scored a
   recommended ‗Education,‘ the outcome would be a recommended ‗Education.‘ If 5
   field reviews were performed on one appraiser within the last 12 months and 2 scored
   a recommended ‗NOD‘ and 3 scored a recommended ‗Education,‘ the outcome would
   be a recommended ‗Removal.‘‖

Appendix B, Attachment 2, Statement of Work, C-1(3)

―As instructed by HUD when the cases are assigned, the contractor shall perform an
interior property review. It is anticipated that HUD will ask the contractor to conduct
interior property reviews of 100% of the subject properties assigned for review. The
interior review shall include examination for any unusual items or serious oversights by
the authorized appraiser of noticeable defects in the property, which could affect the
health and safety of the occupants or continued marketability of the property.‖




                                        26
       Appendix E, Attachment 1

       ―After an analysis of the deficiencies listed above, we have determined that you must
       undergo professional training to improve your performance in order to remain on the
       FHA Appraiser Roster....The training must occur after the date of this letter and must be
       completed within 60 days of the date of this letter.‖

4.HUD Handbook 1840.1, REV-3, Departmental Management Control Program Handbook,
dated February 1999, 7-9E states, ―Sanctions are an essential component of any effective
monitoring process. There will be cases where participants fail or refuse to comply with
recommended actions. Appropriate administrative or programmatic sanctions should be applied
in these cases. Sanctions are used to establish credibility for enforcing the monitoring system.‖

5.Office of Management and Budget (OMB) Circular A-123, Management‘s Responsibly for
Internal Control, effective fiscal year 2006.

       I. Introduction

       ―Management is responsible for developing and maintaining effective internal control.
       Effective internal control provides assurances that significant weaknesses in the design or
       operation of internal control, that could adversely affect the agency‘s ability to meet its
       objectives, would be prevented or detected in a timely manner.‖

       I. Introduction, A. Agency Implementation

       ―Internal control guarantees neither the success of agency programs, nor the absence of
       waste, fraud, and mismanagement, but is a means of managing the risk associated with
       Federal programs and operations. Managers should define the control environment (e.g.,
       programs, operations, or financial reporting) and then perform risk assessments to
       identify the most significant areas within that environment in which to place or enhance
       internal control. The risk assessment is a critical step in the process to determine the
       extent of controls. Once significant areas have been identified, control activities should
       be implemented. Continuous monitoring and testing should help to identify poorly
       designed or ineffective controls and should be reported upon periodically. Management
       is then responsible for redesigning or improving upon those controls. Management is
       also responsible for communicating the objectives of internal control and ensuring the
       organization is committed to sustaining an effective internal control environment.‖

6.HUD Handbook 4150.2, chapter 6, Appraiser and Appraisal Monitoring, dated June 24, 1999.

       6-0 Introduction

       ―The review process is a critical quality control and performance monitoring mechanism
       for HUD. FHA will monitor appraisals and appraisers using statistical analysis and field
       reviews. Through analysis of performance measures, FHA will identify candidates for




                                               27
field reviews. By performing statistical analysis as well as field reviews, HUD maintains
the capability to broadly track its portfolio and investigate it in greater depth.‖

6-3 Appraisal Review Process

―The oversight process includes statistical analysis of appraisals and field reviews. The
reviews will be used to determine the reliability of the appraisals supporting FHA
financing as well as the performance of the appraiser. To gauge an appraiser‘s
performance, REAC [the Real Estate Assessment Center] will review a sample of
appraisals performed for FHA over a specified time period and/or specified number of
appraisals performed.‖




                                        28
Appendix B

SCHEDULE OF DESK REVIEW ERRORS AND/OR OMISSIONS
                BY CASE NUMBER
We compared HUD‘s desk review checklist reports15 to the supporting appraisal packages and,
following the same guidance provided to HUD‘s desk reviewers, identified obvious errors and/or
omissions in the following 24 cases. An Inspector General state-certified appraiser verified the
results shown below.

         Obvious errors and/or omissions found in HUD's field review feasibility checklist
                                            answers
         FHA case numbers A B           C D E F G H I J K L M N Totals
           011-5497620        x   x     x    x x          x                           6
           352-5391904            x     x       x             x            x x        6
           105-2596255        x   x                x             x                    4
           197-3441495            x     x          x      x                           4
           332-4441435        x   x     x    x                                        4
           052-4008623        x   x                                     x             3
           061-2889866        x   x                x                                  3
           094-5174144        x              x x                                      3
           095-0230735                  x       x                       x             3
           137-3335740        x   x     x                                             3
           197-3610011                       x                x x                     3
           381-7680288                  x    x            x                           3
           052-3464429                               x              x                 2
           052-3723298                  x                           x                 2
           121-2260716        x   x                                                   2
           201-3529869                  x                     x                       2
           263-3809705        x              x                                        2
           351-4726939        x   x                                                   2
           431-4202474        x         x                                             2
           461-3997954        x                      x                                2
           495-7449556                             x x                                2
           372-3538299            x                                                   1
           332-4360233        x                                                       1
           197-3612875                  x                                             1
         Total errors and/or
             omissions       13 11 11 6 4 4 3 3 3 2 2 2 1 1                          66




15
     Field review feasibility checklist.


                                                29
                                              Legend

A. ―Photos and/or maps are either omitted or are of poor quality or the building sketch is
    insufficient.‖

B. ―Comparable(s) is/are not within defined neighborhood boundaries and the appraiser does not
    provide adequate explanation.‖

C. ―Appraiser indicates generic descriptions (i.e. ―equal,‖ ―similar,‖ ―same,‖ ―typical‖) as
    opposed to specific descriptions required for items listed in the sales grid.‖

D. ―Well and/or septic separation distances are not sketched; or there are no comments as to
    whether public services are available.‖

E. ―The subject‘s building sketch of room counts, gross living area, etc. do not match the
    description provided on the URAR [uniform residential appraisal report].‖

F. ―Recent prior sales – strong indicator of fraud‖

G. ―Zoning code is missing or incomplete; or zoning description is vague or misleading; or
    zoning compliance (i.e., status as to conforming or non-conforming) is not properly
    qualified,‖ or ―Specific zoning classification is missing or zoning description is missing,
    vague; or zoning compliance is not properly qualified.‖

H. ―Failure to report type of financing and/or sales concessions.‖

I. ―Adjustments are inconsistent, not logical, or not market supported.‖

J. ―Gross adjustments exceed 25% overall, 15% net, and 10% line without explanation,‖ or
    ―Adjustment ratios exceed 25% gross, 15% net, and/or 10% line without adequate
    explanation.‖

K. ―Data and/or Verification Sources were not identified,‖ or "Data source(s), offering price(s),
    and date(s) of prior or current listings are not reported for the subject property currently
    offered for sale or offered for sale within the last twelve months.‖

L. ―Remaining Economic Life is not reported or adequate explanation is not provided.‖

M. ―FEMA [Federal Emergency Management Agency] Flood information is missing or
   inaccurate.‖

N. ―After comparing the price range described by the appraiser in the range of property values in
    the Neighborhood Section to the sales price and the adjusted sales price of the comparables,
    the subject indicated value appears to be outside the ranges indicated by the appraiser.‖




                                                30