[Federal Register Volume 67, Number 141 (Tuesday, July 23, 2002)]
[Proposed Rules]
[Pages 48344-48345]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18672]



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Part V





Department of Housing and Urban Development





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24 CFR Part 200



FHA Appraiser Watch Initiative; Advance Notice of Proposed Rulemaking; 
Proposed Rule

  Federal Register / Vol. 67, No. 141 / Tuesday, July 23, 2002 / 
Proposed Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 200

[Docket No. FR-4744-A-01]
RIN 2502-AH81


FHA Appraiser Watch Initiative; Advance Notice of Proposed 
Rulemaking

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Administration, HUD.

ACTION: Advance Notice of proposed rulemaking.

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SUMMARY: This document requests comments on issues related to the 
implementation of the Federal Housing Administration (FHA) Appraiser 
Watch Initiative. Through the Appraiser Watch Initiative, HUD plans to 
establish and monitor a performance standard that appraisers must meet 
to maintain their status on the FHA Appraiser Roster (Roster). HUD is 
considering an approach modeled on FHA's Credit Watch Termination 
Initiative that would provide for an electronic, fully computerized 
Appraiser Watch monitoring system, and would permit an appraiser to be 
removed from the Roster if the rate of defaults and claims on closed 
mortgages linked to the appraiser exceeds a rate established by HUD.

DATES: Comment Due Date: September 23, 2002.

ADDRESSES: Interested persons are invited to submit comments regarding 
this advance notice of proposed rulemaking to the Regulations Division, 
Office of General Counsel, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410-0500. 
Communications should refer to the above docket number and title. 
Facsimile (FAX) comments are not acceptable. A copy of each 
communication submitted will be available for public inspection and 
copying between 7:30 a.m. and 5:30 p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Vance Morris, Director, Office of 
Single Family Program Development, Room 9266, Department of Housing and 
Urban Development, 451 Seventh Street, SW., Washington, DC 20410-8000; 
telephone (202) 708-2121 (this is not a toll-free number). Persons with 
hearing or speech impairments may access this number via TTY by calling 
the toll-free Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

A. Critical Role of Appraisers in FHA-Insured Home Loans

    An appraisal is required for every property purchased with an FHA-
insured mortgage. The purpose of an FHA appraisal is to determine the 
property's eligibility for mortgage insurance on the basis of its 
condition and location, and to estimate the value of the property for 
mortgage insurance purposes. As stated in a recent Congressional 
report, ``With the high loan-to-value ratio of most FHA loans, an 
accurate appraisal is critical to minimizing HUD's insurance risk.'' 
(Minority Staff of the Permanent Subcommittee on Investigations of the 
Senate Comm. on Governmental Affairs, 107th Cong., 1st Sess., Property 
``Flipping'': HUD's Failure to Curb Mortgage Fraud 56 (Committee Print 
2001)). In recognition of the importance of an accurate appraisal, 
section 202(e)(1) of the National Housing Act requires FHA appraisals 
to be performed by ``individuals who have demonstrated competence and 
whose professional conduct is subject to effective supervision.'' The 
purpose of this notice is to request comments on establishing a system 
that will enable FHA to remove poorly performing appraisers from the 
Roster on the basis of high default and claim rates on loans secured by 
the properties appraised by such appraisers. As discussed in greater 
detail in section E, of this notice, HUD is specifically requesting 
comments on a broad range of issues being considered before a proposed 
rule is issued. This oversight of appraisal performance will help 
address the concerns that have been raised about this critical segment 
of the FHA single family mortgage insurance programs.

B. The FHA Credit Watch Termination Initiative As a Model Approach for 
Appraisers

    The Appraiser Watch Initiative would implement one of several new 
initiatives to protect FHA. Specifically, HUD proposes to establish an 
``Appraiser Watch'' system, similar to the successful Credit Watch 
system for FHA lenders. The benefit of following an established system 
is that it provides for the application of a clear, familiar and 
consistent approach to these closely related segments of the FHA 
insurance process. Such an approach would prompt these segments to work 
more closely and cooperatively to fulfill responsibilities held in 
common, attain common goals, and avoid common pitfalls.
    Approval of a mortgagee by HUD/FHA to participate in FHA mortgage 
insurance programs includes an Origination Approval Agreement (the 
Agreement) between HUD and the mortgagee. Under the Agreement, the 
mortgagee is authorized to originate single family mortgage loans and 
submit them to FHA for insurance endorsement. Some mortgagees, however, 
have demonstrated high default and claim rates on their FHA-insured 
portfolios that, although not signifying violations of FHA 
requirements, are nonetheless unacceptable. As a result, HUD developed 
the Credit Watch Termination Initiative to identify mortgagees with 
unsatisfactory performance levels and take ameliorative action at an 
early stage.
    Under the FHA Credit Watch Termination Initiative, FHA 
systematically reviews mortgagees' early default and claim rates, that 
is, defaults and claims on mortgagees' loans during the initial 24 
months following endorsement. In cases of severe performance 
deficiencies, HUD may terminate mortgagees' loan origination approval 
authority. The Termination of a mortgagee's Agreement is separate and 
apart from any action under 24 CFR part 25 taken by HUD's Mortgagee 
Review Board against mortgagees for violations of FHA requirements.

C. HUD's FHA Appraiser Roster

    HUD has taken various steps to ensure the integrity of FHA 
appraisals. On June 1, 1998, HUD launched reforms of the FHA appraisal 
process through its Homebuyer Protection Plan. The purpose of these 
reforms is to ensure that a lender and FHA receive accurate and 
complete appraisals of homes. In keeping with these reforms, HUD has 
established regulatory placement and removal procedures for the Roster. 
These procedures are codified in subpart G of HUD's regulations at 24 
CFR part 200.
    HUD's Appraiser Roster lists those appraisers who are eligible to 
perform FHA single family appraisals. HUD established the Roster to 
provide a means by which HUD can monitor the quality of appraisers who 
perform appraisals on single family homes with FHA single family 
mortgage insurance and to ensure that appraisers performing appraisals 
meet high competency standards. The Roster is an important part of the 
FHA Single Family Mortgage Insurance program because accurate, 
competent and professional appraisals are vital to the success of the 
program and HUD's ability to protect the FHA Insurance Fund.

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D. Appraiser Watch Initiative

    HUD is soliciting comments on using a performance-based Appraiser 
Watch Initiative similar to the successful Credit Watch system 
described above for FHA lenders. The Appraiser Watch system would rate 
appraisers on the performance of loans secured by properties they 
appraised. Appraisers who are associated with excessive default and 
claim rates are subject to notification of proposed removal from the 
Roster within 60 days. Just as a consistently higher level of poor 
underwriting is reasonably expected to be linked to a consistently 
higher level of defaults, a consistently higher level of poor 
appraisals may be associated with a consistently higher level of 
defaults, regardless of the quality of the underwriting. This is 
because the appraisal is a key component of the underwriting process, 
and when this key component is inadequate, the rest of the process is 
adversely affected from the onset, increasing the probability of 
default and claims. While poor underwriting practices also increase the 
probability of defaults and claims, it is reasonable to conclude that 
at some point, a high enough rate of defaults and claims on loans 
secured by properties appraised by an appraiser is indicative of 
inadequate performance.
    Under a rule similar to Credit Watch, an appraiser may be subject 
to removal from the Roster if the rate of defaults and claims on closed 
mortgages secured by properties with appraisals performed by the 
appraiser exceeds the normal rate in the area of a HUD field office by 
a specified amount, and exceeds the national default and claim rate for 
closed mortgages. In the case of Credit Watch, lenders are subject to 
removal if the rate exceeds 200 percent of the normal rate in the field 
office area. Such an objective, performance-based standard allows for 
the most efficient use of HUD's limited resources to conduct across-
the-board monitoring of appraisers.
    Upon receiving notification of proposed removal under Appraiser 
Watch, an appraiser may request an informal conference to present HUD 
with relevant reasons and factors, including factors beyond the 
appraiser's control, that may have contributed to the excessive default 
and claim rates. HUD may withdraw the removal notice based upon the 
informal conference.
    Consistent with the goals of the Administration regarding the 
increased use of technology in government, the Appraiser Watch system 
being considered would allow for electronic monitoring. HUD's 
electronic Neighborhood Watch system, available via the FHA Connection, 
would be used for this purpose. Specifically, HUD would, on an ongoing 
basis, review the FHA mortgage default and claim rate on loans secured 
by properties appraised by an appraiser in the geographic region served 
by a HUD field office and according to the type of appraisal conducted 
(i.e., single family, or 2- to 4-unit, or rehabilitation). An 
appraiser's performance would be determined relative to the performance 
of other appraisers in the same geographic area conducting the same 
type of appraisal over the same period of time. HUD would make this 
information available to appraisers and the public on an ongoing basis 
through the Neighborhood Watch system.
    To keep the public informed of the status of appraisers, HUD 
believes it is appropriate for any system that is adopted to provide 
for publication of the names of appraisers removed from the Roster 
pursuant to Appraisal Watch. Further, to prevent delays and disruptions 
in any transactions already in progress, HUD believes the appraiser 
should be permitted to complete any appraisal already contracted for, 
but not be permitted to take on any additional appraisals as of the 
date of removal from the Roster. Appraisers should also be permitted to 
apply for reinstatement. Appraiser watch is proposed to be a procedure 
separate and apart from the Appraiser Roster Placement and Removal 
procedures contained in 24 CFR part 200 subpart G. Any rule promulgated 
as a result of this ANPR would clearly provide that Appraiser Watch 
removal is in addition to and independent from any other remedies and 
actions available to HUD under applicable law.

E. Additional Considerations and Request for Comments

    HUD seeks to establish a clear, consistent and familiar standard 
and procedure for an appraiser to maintain status on, or be removed 
from, the Roster. Because it is HUD's goal to promulgate a rule that 
will promote, in a fair, reasonable, and efficient manner, the highest 
standard of conduct and professionalism among FHA Appraisers, thereby 
minimizing the risk of loss to the FHA, HUD is requesting public 
comment on all aspects of promoting and maintaining the excellence and 
integrity of appraisers listed on the Roster. In particular, HUD 
requests comments on the following issues:
    1. Whether HUD should establish a minimum number of appraisals as a 
threshold for any action, and if so, what number would be appropriate.
    2. Whether HUD should specify the age of loans secured by appraised 
properties that would be considered under a standard, and what loan age 
would be appropriate (e.g., appraisals for loans not more than one, two 
or three years old, measured from the time of origination).
    3. Whether a higher or lower rate than the 200 percent used in 
Credit Watch would provide an adequate measure of appraiser performance 
and level of protection for FHA.
    4. What period of time over which appraisals are conducted should 
be used for evaluation purposes (e.g., performance over 12 months, or 
18 months, or 24 months)?
    5. What factors in addition to the rate of loan defaults and FHA 
insurance claims should HUD consider in evaluating appraiser 
performance?
    6. Should the severity of loss be considered as a factor in 
evaluating an appraiser's performance?
    7. If included as a factor, how should severity of loss be 
considered in evaluating performance?
    8. What kinds of factors should be considered as mitigating for an 
appraiser with higher than normal default and claim rates (e.g., 
factors beyond the appraiser's control)?
    9. How much time should be provided for an appraiser to request an 
informal conference after receiving notification of proposed removal 
(e.g., 15, 30, or 45 days)?
    10. What is an appropriate period of removal from the roster before 
a reinstatement is permitted?
    11. What are appropriate procedures and factors to consider for 
reinstatement?

    Dated: July 17, 2002.
Sean Cassidy,
General Deputy Assistant Secretary for Housing-Federal Housing 
Commissioner.
[FR Doc. 02-18672 Filed 7-22-02; 11:25 am]
BILLING CODE 4210-27-P