HUD Has Strengthened Its Criteria for Placing Appraisers on Its Roster, but Has Limited Assurance that These Criteria Are Being Implemented

HUD issued guidance and regulations in order to help ensure that  appraisers it approves to perform appraisals under its Single-Family  Mortgage Insurance programs are qualified to be placed on the appraiser  roster. Although  HUD has strengthened its criteria for approving appraisers to perform  appraisals, quality control over the approval process is limited. Before 1999, HUD relied largely  on the states’ licensing processes to ensure that appraisers were qualified  to perform appraisals. However, the states’ minimum licensing standards  did not include proficiency in HUD appraisal requirements. According to  HUD’s new guidance, in order to be eligible for placement on the roster, an  appraiser must (1) pass an examination on HUD appraisal methods and  reporting; (2) be state licensed or state certified, with credentials based on  the minimum criteria issued by the Appraiser Qualifications Board of the  Appraisal Foundation; and (3) not be listed on the General Services  Administration’s Suspension and Debarment List, HUD’s Limited Denial of  Participation List, or HUD’s Credit Alert Interactive Voice Response  System. An appraiser whose licensing or certification in a state has been  revoked, suspended, or surrendered as a result of a state disciplinary  action is automatically removed from the roster. In 1999, we reported  that HUD’s guidance called for random reviews of 10 percent of all  appraisals. Because the HOCs do not maintain a permanent record of the data used to  identify appraisers for review each quarter, we could not verify that the  appraisers they placed on their target lists were actually those that met  HUD’s criteria. However, the HOCs did not review every appraiser to the extent called for  in the guidance. The HOCs performed, on average, about 5.6 desk reviews  for each appraiser reviewed during fiscal year 2003 and the first half of  2004. We found that HUD staff do not routinely visit appraised properties to  verify the work of the field review contractors. HUD reviews  and quantifies appraisers’ work by using a Web-based tool, the Appraisal  Review Process, a system that scores each appraiser on several appraisals,  weighting the scores to capture violations that pose the greatest risk to  FHA’s mortgage insurance fund. As figure 5 illustrates, for the 1,004 appraisers field reviewed by  HUD in fiscal year 2003 and the first half of fiscal year 2004, 620 sanctions  were imposed, with 180 appraisers having been removed from the  appraiser roster. Conclusions

The importance of accurate appraisals to HUD’s Single-Family Mortgage  Insurance programs underscores the need for effective appraiser oversight. Since our April 1999 report, HUD has taken a number of steps  designed to ensure the qualifications of appraisers on its roster; improve  the efficiency and effectiveness of its oversight, specifically by revising its  guidance to focus on appraisers (rather than appraisals) and incorporating  a risk-based monitoring approach; and facilitate enforcement actions by  empowering HOCs and developing a scoring system to promote  consistency. Recommendations for Executive Action

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, we recommend 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 in  order 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 in order to ensure that  the HOCs target and review appraisers based on the criteria in HUD  guidance; and  implement a cost-effective field review contractor oversight process  that includes on-site monitoring. With respect  to HUD’s adoption of a new risk-based approach for monitoring appraisers,  we reported that HUD’s process for monitoring appraisers is risk based and  that HUD modified its approach to target for review appraisers who are  associated with known risks to FHA’s mortgage insurance fund. In turn, this limits  HUD’s ability to determine, over time, the effectiveness of its targeting  criteria in reducing risk to the mortgage insurance fund. To examine HUD’s efforts to take enforcement actions against appraisers it  identifies as not complying with its requirements, we reviewed HUD’s  guidance regarding enforcement actions taken against poorly performing  appraisers.
Why GAO Did This Study

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

What GAO Found

Through new guidance and regulation, HUD has strengthened its criteria for placing appraisers on its appraiser roster--which establishes their eligibility to participate in HUD programs. Before 1999, HUD relied largely on the states' licensing processes to ensure that appraisers were qualified, but the states' minimum licensing standards did not specifically include proficiency in HUD's appraisal requirements. HUD's 1999 guidance requires appraisers to, among other things, pass an examination on HUD appraisal methods and reporting. Further, a 2003 regulation provides for, among other things, removing from the roster appraisers whose licenses have been suspended or revoked. However, HUD has limited quality control over the approval process, limiting the department's assurance that its criteria are being effectively implemented. HUD has adopted an oversight approach that focuses on appraisers it believes pose risks to FHA's mortgage insurance fund, but certain weaknesses exist in its implementation. HUD's guidance calls for its homeownership centers (HOCs)--which are largely responsible for appraiser oversight--to develop quarterly targeting lists of appraisers for review based on certain criteria, or risk factors. The primary factor is the rate of defaults in certain loans associated with the appraiser; others include large numbers of appraisals as well as appraisals for loans made under one of HUD's programs known to be at higher risk of fraud and abuse. However, the HOCs do not maintain a permanent record of the data used to identify the targeted appraisers--even though HUD's automated system would enable them to--which limits HUD's ability to verify that those targeted were those that met the criteria and to determine the effectiveness of its targeting criteria in reducing risk to the mortgage insurance fund. GAO found that during fiscal year 2003 and the first half of fiscal year 2004 the HOCs generally reviewed the appraisers they identified as high risk and targeted for review. However, they reviewed fewer appraisals for each targeted appraiser than HUD's guidance prescribes: on average, about 5.6 appraisals instead of the 10 called for. GAO also found that HOC staff did not routinely visit appraised properties to verify the work of contractors whoconduct field reviews of selected appraisers. To facilitate enforcement actions against appraisers, HUD expanded the HOCs' authority to sanction appraisers and developed a new appraisal scoring system. According to HUD, the number of actions taken to remove appraisers from its roster has increased from 25 at a cost of over $10 million in 1998 to 132 at a cost of under $300,000 in 2003. HUD also developed a tool that scores each appraiser on several appraisals, weighting the scores to capture violations that pose the greatest risk to FHA's mortgage insurance fund. According to HUD, this tool allows the department to sanction appraisers more consistently.