oversight

HUD's Statement of Work for Appraisal Field Review Services Did Not Always Require Sufficient Confirmation of an Interior Review

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-12-02.

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

                                                                           Issue Date
                                                                                    December 2, 2011
                                                                           Audit Report Number
                                                                                        2012-LA-0002




TO:            Deborah Holston, Acting Deputy Assistant Secretary for Single Family Housing.
               HU



FROM:          Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: HUD’s Statement of Work for Appraisal Field Review Services Did Not Always
         Require Sufficient Confirmation of an Interior Review


                                        HIGHLIGHTS

    What We Audited and Why

                We audited the U.S. Department of Housing and Urban Development’s (HUD)
                field review appraisal process. This audit was conducted as part of the HUD
                Office of Inspector General’s (OIG) fiscal year 2011 annual audit plan and was
                designed to follow up on selected findings in OIG’s Audit Report 2008-LA-
                00031 on the appraiser review process. Our objective was to determine
                whether HUD (1) ensured that field review appraisers complied with the
                appraisal review process requirements and (2) paid contractors according to the
                scope of work performed.




1
 “Implementation Weaknesses Existed in All Major Phases of the FHA Appraiser Review Process,” issued
September 4, 2008
What We Found


           HUD had ensured that the field review appraisers complied with the interior
           review inspection requirements and the contract field reviews appraisers were
           paid according to the scope of work performed. However, HUD’s statement of
           work for appraisal field review services did not always require sufficient
           confirmation of an interior review.

What We Recommend


           We recommend that the Acting Deputy Assistant Secretary for Single Family
           Housing amend the statement of work for appraisal field review services to
           require that an interior photograph be taken in all instances in which an interior
           review is performed.

           For each recommendation in the body of the report without a management
           decision, please respond and provide status reports in accordance with HUD
           Handbook 2000.06, REV 4. Please furnish us copies of any correspondence or
           directives issued because of the audit.

Auditee’s Response


           We provided HUD a draft report on October 31, 2011, and held an exit
           conference on November 15, 2011. HUD provided written comments on
           November 30, 2011, and generally agreed with our report and
           recommendation. The complete text of the auditee’s response can be found in
           appendix A of this report.




                                           2
                           TABLE OF CONTENTS

Background and Objective                                                       4

Results of Audit
Finding: HUD’s Statement of Work for Appraisal Field Review Services Did Not   6
         Always Require Sufficient Confirmation of an Interior Review

Scope and Methodology                                                          9

Internal Controls                                                              10

Appendixes

      A. Auditee Comments                                                      12




                                           3
                     BACKGROUND AND OBJECTIVE

The Federal Housing Administration (FHA) was created by Congress in 1934 and is the
largest insurer of mortgages in the world, having insured more than 34 million properties
since its inception.

FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the
United States and its territories. FHA insurance reduces a lender’s risk because FHA will pay
a claim to the lender in the event of a homeowner’s default. Loans must meet certain
requirements established by FHA to qualify for insurance. One requirement is that lenders
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.

The appraisal and property condition assessment are used to determine the market value and
acceptability of the property for FHA mortgage insurance purposes. The value serves as a
basis for determining the maximum FHA insurable mortgage loan. The appraisal is
performed for the use and benefit of the U.S. Department of Housing and Urban Development
(HUD) and the lender involved in the FHA transaction. In addition to providing an estimate
of value, the appraisal provides an examination of the property for any visible and obvious or
apparent deficiencies that may affect the livability of that property in terms of basic needs and
the health and safety of the property’s occupants.

HUD’s field review process begins with the desk reviewer. If the desk reviewer concludes
that the appraisal report is inconsistent or unacceptable, an action or field review is
recommended. The field review process consists of an interior and exterior review whenever
possible. The goal is to ensure that the value on which an FHA loan is based does not place
the insurance fund at risk.

In Office of Inspector General (OIG) Audit Report 2008-LA-0003, issued September 4, 2008,
OIG reported that HUD did not have adequate controls over the appraiser review procedures
conducted by the homeownership centers and HUD’s oversight of the appraiser review
process. The report indentified problems with HUD’s not enforcing the field review
requirement for interior inspections and noted HUD staff concerns that contracted appraisers
had claimed or billed for interior inspections that may not have been performed. In response
to the audit report, HUD revised the appraiser review process. The Assistant Secretary for
Housing – Federal Housing Commissioner implemented several new controls including (1) a
written quality control plan for the appraiser review process that includes procedures to
address the implementation weaknesses identified in the report, (2) a systematic process to
evaluate the efficiency and effectiveness of the appraiser review process on a regular and
recurring basis, (3) updating and consolidating the policies and procedures for the appraiser
review process, (4) evaluating the appraiser review process data and reports on a regular and
recurring basis, and (5) providing feedback to the homeownership centers regarding their
implementation of the appraiser review process to promote consistency and best practices.
Final action was completed in July 2010.



                                                4
Objective

Our objective was to determine whether HUD (1) ensured that field review appraisers
complied with the appraisal review process requirements and (2) paid contractors according to
the scope of work performed.




                                              5
                               RESULTS OF AUDIT

Finding: HUD’s Statement of Work for Appraisal Field Review
         Services Did Not Always Require Sufficient Confirmation
         of an Interior Review
HUD had made substantial improvements to the FHA appraiser review process regarding field
reviews in response to the recommendations of OIG Audit Report 2008-LA-0003. However,
HUD’s revised statement of work for appraisal field review services did not require an interior
photograph if there was no finding. If HUD required an interior photograph in all instances, it
would be able to more effectively monitor the field review process and ensure that the
contractor was paid according to the scope of work performed.


 HUD Implemented New
 Controls Over the Appraisal
 Review Process


               HUD took steps to strengthen controls over the appraisal review process. For
               example, it developed and implemented the following:

                      An FHA appraiser review process internal quality control plan,

                      A revised statement of work for appraisal field review services,

                      A desktop guide to the FHA appraiser review process,

                      New reporting forms for the homeownership centers and headquarters,
                      and

                      Revised system functionality relative to the appraiser review process to
                      permit more effective reporting and feedback to the homeownership
                      centers.

 The Revised Statement of Work
 for Appraisal Field Review
 Services Could Be Strengthened


               The statement of work for appraisal field review services was revised as part of
               the improvements made to the appraisal review process. The revision no




                                              6
             longer required an interior photograph if there was no finding. HUD was
             implementing the statement of work as contracts were renewed.

             A field review is recommended if an appraisal is inconsistent or unacceptable.
             According to the statement of work, all data reported by the original appraiser
             for the subject and comparables must be verified. The contractor must conduct
             an interior and exterior review whenever possible. Each interior and exterior
             review will determine the accuracy and quality of the appraisal by ensuring
             that the factual information included in the appraisal report is correctly
             reported and supported. This inspection must be completed in a way that
             allows the reporting of any readily observable defective conditions that do not
             meet HUD minimum property standards or minimum property requirements.
             When access to the property is denied, the contractor must fully document
             attempts made to obtain access to the property and complete an exterior
             review. For exterior reviews only, the contractor will receive 60 percent of the
             contract unit price.

             For the audit, we tested 14 completed field reviews, 7 of which included an
             interior review. We found an instance in which there was no interior
             photograph submitted to confirm the interior review, although the contract with
             the appraiser required an interior photo. The homeownership center excused
             this omission by referencing the revised statement of work, which no longer
             required an interior photograph when there was no finding that needed to be
             substantiated.

             Neither the homeownership center nor HUD headquarters management could
             explain why the statement of work was revised to not require an interior
             photograph if there was no finding. Without the confirmation of an interior
             review, there is an increased risk that noticeable interior property defects may
             not be detected or that appraisers may not be paid for the work performed.
             HUD should, therefore, revise the statement of work to require an interior
             photograph even if there is no finding. This measure would strengthen HUD’s
             monitoring process because there would be documentation supporting the
             interior review. In addition, HUD would be able to ensure that there were no
             obvious and apparent deficiencies, and the appraiser would be paid for the
             scope of work performed.

Conclusion

             HUD had taken significant steps to strengthen the appraisal review process by
             implementing new controls. However, the statement of work for appraisal
             field review services should be strengthened to increase monitoring efforts and
             ensure compliance with HUD policies and procedures.




                                             7
          In response to our inquires, HUD management agreed that it would again
          require the interior photograph and planned to revise the statement of work for
          appraisal field review services to require an interior photograph in all
          instances.

Recommendation


          We recommend that the Acting Deputy Assistant Secretary for Single Family
          Housing

          1A.    Amend the statement of work for appraisal field review services to
                 require that an interior photograph be taken in all instances in which an
                 interior review is performed.




                                         8
                           SCOPE AND METHODOLOGY

We conducted the audit from July through October 2011 remotely from our offices using
electronic records located in FHA Connection and requested documentation. Our audit
covered the period July 1, 2009, through March 31, 2011.

To accomplish our audit objectives, we

        Interviewed both Atlanta and Denver Homeownership Center management and staff
        regarding the field review process and quality control;

        Reviewed instructions and policies developed by HUD;

        Reviewed applicable laws, regulations, guidance, and notices;

        Reviewed and evaluated the following documentation in FHA Connection2: 1) Field
        Review Submission Results, 2) Appraisal Review Report Results, 3) Appraiser
        Review Status Results and 4) exterior and interior pictures to determine whether the
        system was reliable and that it provided the homeownership centers with a complete,
        accurate, and transparent method of monitoring and documenting the field reviews;

        We tested the FHA electronic documentation against Field Review files maintained by
        the HOCs to determine the reliability of the information in FHA Connection; and

        Reviewed and evaluated the appraiser contracts and invoices to determine whether
        HUD paid contractors according to the scope of work performed.

A stratified systemic sample of 45 completed field reviews was pulled from a universe of
2,964 field reviews completed between July 2009 and March 31, 2011. The survey sample
reviewed consisted of 14 of the 45 completed field reviews, 7 of which consisted of both
interior and exterior review and the remaining 7 exterior only. One of the 14 field reviews
was conducted by HUD staff.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objective.


2
   FHA Connection is an internet based system that allows FHA-approved lenders and business partners to have
real-time access to several of FHA’s systems over HUD’s internet system for the purpose of originating and
servicing loans. In addition, FHA Connection interactive application gives HUD’s business partners interaction
with HUD’s mainframe system to do research and update files.



                                                       9
                             INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s
mission, goals, and objectives with regard to

       Effectiveness and efficiency of operations,

       Reliability of financial reporting and

       Compliance with applicable laws and regulations.

Internal controls comprise plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as
the systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


               We determined that the following internal controls were relevant to our audit
               objective:

                      Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that the program meets its
                      objectives.

                      Compliance with applicable laws and regulations - Compliance with
                      applicable internal and regulatory requirements.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control
               does not allow management or employees, in the normal course of performing
               their assigned functions, the reasonable opportunity to prevent, detect, or
               correct (1) impairments to effectiveness or efficiency of operations, (2)
               misstatements in financial or performance information, or (3) violations of
               laws and regulations on a timely basis.




                                                10
Significant Deficiency


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

                   Controls over program operations were not sufficient to effectively
                   monitor the field review process.




                                           11
Appendix A

             AUDITEE COMMENTS


                   Auditee Comments




                    12