On-site assessments of completed appraisals, known as field reviews, are HUD’s principal tool for monitoring the performance of the appraisers on FHA’s roster. In fiscal year 1998, HUD performed about 81,000 field reviews of appraisals nationwide. However, three of the four HOCs did not meet HUD’s policy requirement to field review at least 10 percent of the FHA appraisals performed within their jurisdictions. For example, the HOCs’ records for 126 field reviews conducted during the period from October 1, 1997, through June 30, 1998, that rated the appraisals as poor, showed that HUD approved mortgage insurance for 96 of the homes that were the subjects of these reviews. HOCs Did Not Fully Implement Guidance on Consumer Complaint Procedures

Consumers’ complaints are another means by which HUD obtains information about the quality of the appraisals used to support FHA-insured mortgages. HUD prohibited only 11 of these appraisers from conducting further FHA appraisals. HUD Has Not Aggressively Enforced Its Policy on Lenders’ Accountability for Appraisals

HUD’s policy is that lenders are responsible, equally with the appraisers they select, for the accuracy and thoroughness of appraisals. HUD has not aggressively enforced this policy because of disagreement within HUD over its authority to do so. Among other things, the letter stated that (1) the lender did not know the appraiser had performed the appraisal in an unsatisfactory manner; (2) there was no basis to believe that the lender should have known about the unsatisfactory nature of the appraisal; (3) there was no financial tie, business affiliation, or conflict of interest between the lender and the appraiser; and (4) HUD did not have the authority to hold lenders responsible for the acts, errors, or omissions of independent appraisers. Appraisers must be state-licensed or -certified to qualify for FHA’s appraiser roster, but the states’ minimum licensing standards do not require expertise in conducting FHA appraisals. HUD is revising its appraisal guidance and forms and is adopting a testing requirement for appraisers. In addition, a procedural change by HUD has made field reviews less timely, with the result that HUD did not learn of problems with certain appraisals until after HUD had already approved mortgage insurance on the properties. Recommendations

To reduce the financial risks assumed by FHA and to improve HUD’s oversight of appraisers on FHA’s roster, we recommend that the Secretary of HUD direct the Assistant Secretary for Housing-Federal Housing Commissioner to achieve better field review coverage of FHA’s appraiser roster by (1) ensuring that each HOC field reviews the required percentage (currently 10 percent) of the FHA appraisals conducted annually within its geographic jurisdiction and (2) requiring that when selecting appraisals for field review, HUD staff give higher priority to the work of appraisers who have done a substantial number of FHA appraisals but have not been field reviewed within the past year; make field reviews of appraisals more timely by establishing a process to ensure that HUD staff obtain copies of appraisal reports and perform field reviews prior to FHA’s approval of mortgage insurance; and better assess the quality of appraisal field reviews by insuring that a portion of each field review contractor’s work is verified through on-site evaluation of properties field reviewed by the contractor. Comments From the Department of Housing and Urban Development

Objectives, Scope, and Methodology

Our objectives were to answer the following questions: (1) How well is the Department of Housing and Urban Development (HUD) monitoring the performance of the appraisers on its roster and implementing procedures for addressing consumers’ complaints about Federal Housing Administration (FHA) appraisals? (2) To what extent is HUD holding appraisers accountable for poor-quality FHA appraisals? (3) To what extent is HUD holding lenders responsible for the quality of the FHA appraisals they use? (4) How does HUD ensure that the appraisers on its roster are qualified to perform FHA appraisals? To determine the extent to which HUD was holding appraisers accountable for poor-quality appraisals, we reviewed HUD’s guidance regarding enforcement actions against poorly performing appraisers.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Federal Housing Administration's (FHA) appraisal process, focusing on: (1) how well the Department of Housing and Urban Development (HUD) is monitoring the performance of the appraisers on its roster and implementing procedures for addressing consumers' complaints about FHA appraisals; (2) the extent to which HUD is holding appraisers accountable for poor-quality FHA appraisals; (3) the extent to which HUD is holding lenders responsible for the quality of the FHA appraisals they use; and (4) how HUD ensures that appraisers on its roster are qualified to perform FHA appraisals.

What GAO Found

GAO noted that: (1) HUD is not doing a good job of monitoring the performance of appraisers; (2) on-site evaluations of completed appraisals, known as field reviews, are HUD's principal tool for assessing the quality of appraisers' work; (3) in fiscal year (FY) 1998, HUD performed about 81,000 of these reviews, but three of the four HUD homeownership centers (HOC) did not meet HUD's requirement to field review no less than 10 percent of the FHA appraisals performed within their jurisdictions; (4) although HUD's guidance states that timeliness is essential to ensure quality field reviews, half of the field reviews conducted in FY 1998 did not occur until more than 2 months after the appraisals had been performed; (5) moreover, HUD did not learn about problems with some appraisals until after it had already approved mortgage insurance for the properties; (6) the Philadelphia and Denver HOCs' records for 126 field reviews that rated the appraisals as poor showed that HUD approved mortgage insurance for 96 of the homes covered by these reviews; (7) HUD staff did not routinely visit appraised properties to determine the accuracy of the field review contractors' observations; (8) the Philadelphia and Denver HOCs did not fully implement guidance on the handling and tracking of consumers' complaints, including those relating to appraisals; (9) HUD is not holding appraisers accountable for the quality of their appraisals; (10) contrary to HUD's policy, appraisers who received two or more poor ratings in field reviews were frequently not prohibited from conducting further FHA appraisals; (11) a poor field review score indicates that the appraiser made errors and omissions that could result in an unacceptable insurance risk to FHA; (12) HUD has not aggressively enforced its policy to hold lenders equally accountable with the appraisers they select for the accuracy and thoroughness of appraisals because of a disagreement within HUD over its authority to do so; (13) HUD has limited assurance that the appraisers on its roster are knowledgeable about FHA's appraisal requirements; (14) HUD relies largely on the states' licensing process to ensure that appraisers are qualified, but the states' minimum licensing standards do not include proficiency in FHA's appraisal requirements; and (15) HUD is revising its appraisal guidance and forms to better clarify the roles and responsibilities of appraisers and is adopting a testing requirement for appraisers to ensure their competency in FHA's appraisal standards.