Single-Family Housing: HUD's Risk-Based Oversight of Appraisers
Could Be Enhanced (05-NOV-04, GAO-05-14).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-14
ACCNO: A13333
TITLE: Single-Family Housing: HUD's Risk-Based Oversight of
Appraisers Could Be Enhanced
DATE: 11/05/2004
SUBJECT: Appraisals
Fair market value
Government guaranteed loans
Mortgage loans
Mortgage programs
Mortgage protection insurance
Real estate sales
Sanctions
Personnel management
Risk management
Personnel qualifications
FHA Single-Family Mortgage Insurance
Program
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GAO-05-14
Report to Congressional Addressees
November 2004
SINGLE-FAMILY HOUSING
HUD's Risk-Based Oversight of Appraisers Could Be Enhanced
Contents
Table
Figures
Abbreviations
November 5, 2004Letter
The Honorable Paul Sarbanes Ranking Minority Member Committee on Banking,
Housing, and Urban Affairs United States Senate
The Honorable Michael Oxley Chairman The Honorable Barney Frank Ranking
Minority Member Committee on Financial Services House of Representatives
Incomplete or inaccurate real estate appraisals resulting in property
overvaluations could expose the Department of Housing and Urban
Development's (HUD) Federal Housing Administration (FHA)-which insured
about 3.7 million single-family mortgage loans with a total value of about
$425 billion in fiscal years 2001 to 2003-to greater financial risks.1
Effectively overseeing the appraisers who prepare appraisals for its
Single-Family Mortgage Insurance programs has historically been a
challenge for HUD. In April 1999, we reported that weaknesses in HUD's
appraiser approval, monitoring, and enforcement efforts pointed to the
need for improvements.2 We have also reported in the past that due in part
to poor appraiser oversight, HUD's Single-Family Mortgage Insurance
programs remained a high-risk area for the department.3 Furthermore, HUD's
Inspector General noted in its most recent semiannual report to Congress
that its audits and investigations continue to reveal fraud and abuse in
HUD's Single-Family Mortgage Insurance programs.4
We conducted this review at the initiative of the Comptroller General and
as a follow up to our 1999 report. This report examines HUD's processes
for listing appraisers on its roster-which establishes their eligibility
to participate in the department's Single-Family Mortgage Insurance
programs-and for overseeing the appraisers' work. Specifically, this
report examines (1) how HUD ensures that appraisers it approves to perform
appraisals under its Single-Family Mortgage Insurance programs are
qualified to be placed on the appraiser roster; (2) the extent to which
HUD uses a risk-based approach when monitoring the appraisers
participating in its Single-Family Mortgage Insurance programs; and (3)
HUD's efforts to take enforcement actions against appraisers it identifies
as not complying with its requirements. We did not estimate the impact
that HUD's appraiser oversight has on the financial health of FHA's
mortgage insurance fund.
To address these objectives, we reviewed the activities of HUD's
headquarters and its four homeownership centers (HOCs) in Atlanta,
Georgia; Denver, Colorado; Philadelphia, Pennsylvania; and Santa Ana,
California. Specifically, we reviewed HUD's process for approving
appraisers to participate in its programs. Also, at each HOC, we obtained
and analyzed data on the appraisers targeted for review by HUD during
fiscal year 2003 and the first half of fiscal year 2004. In addition, we
examined data on the types and number of enforcement actions HUD has taken
against appraisers. We assessed the reliability of the HUD data we used by
reviewing information about how the data were collected, and we performed
electronic testing to detect obvious errors in completeness and
reasonableness. We determined that the data were sufficiently reliable for
the purposes of this report. We performed our work from December 2003 to
August 2004 in accordance with generally accepted government auditing
standards. Appendix I provides additional details on our scope and
methodology.
Results in Brief
Through new guidance and regulation, HUD has strengthened its criteria for
placing appraisers on its appraiser roster, but control weaknesses limit
assurance that these criteria are being implemented. Before 1999, HUD
relied largely on the states' licensing processes to ensure that
appraisers were qualified to perform appraisals, but the states' minimum
licensing standards did not specifically include proficiency in HUD's
appraisal requirements. In 1999, HUD issued guidance that required
appraisers to (1) pass an examination on HUD appraisal methods and
reporting; (2) meet either state licensing standards or certification
standards based on criteria issued by the private Appraisal Qualifications
Board;5 and (3) not be listed on various government and HUD excluded-party
lists. Also, in 2003, HUD published a final rule making several changes to
the licensing and certification requirements for the roster. Although HUD
increased the requirements for placing appraisers on the roster, it has
limited controls for assuring that only eligible appraisers are listed.
Specifically, HUD does not routinely conduct quality control reviews of
this process to ensure that it is being implemented appropriately.
HUD has focused its appraiser oversight efforts on appraisers that it has
determined pose risks to FHA's mortgage insurance fund, but weaknesses
exist in implementing these efforts. HUD's guidance calls for each HOC to
target for review at least 30 appraisers each quarter, based on several
risk factors. The primary risk factor is the "early default rate" of loans
associated with the appraiser. (Early defaults are those that (1) occur
within 12 months of loan origination and (2) represent a delinquency of 90
days or greater.) From this initial pool of appraisers associated with
high early default rates, the HOCs identify those appraisers who during
the preceding year performed 10 or more appraisals and who performed
appraisals for five or more defaulted mortgages. The HOCs also target for
review appraisers who performed appraisals in connection with loans
insured under HUD programs known to be at higher risk of fraud and abuse.
Although it is the primary factor behind HUD's targeting approach, the
HOCs do not maintain a permanent record of the data used to identify the
initial pool of appraisers for review each quarter. Because of this, we
could not verify that the targeted appraisers were actually those that met
HUD's criteria. The HOCs generally reviewed the appraisers that were
targeted as high risk. Specifically, the HOCs reviewed about 78 percent of
the 936 appraisers placed on the target lists during fiscal year 2003 and
the first half of fiscal year 2004. However, the HOCs did not perform as
many desk reviews-analyses of written appraisal reports for completeness,
compliance, and reasonable and logical conclusions of property value-per
appraiser reviewed as HUD's guidance calls for. Specifically, while the
guidance instructs HOCs to perform desk reviews of at least 10 appraisals
prepared by each appraiser reviewed, the HOCs performed, on average, about
5.6 desk reviews. Further, HUD staff did not routinely visit properties to
verify the work of contractors responsible for conducting field
reviews-comprehensive inspections of appraised properties intended to
assess the quality of written appraisals.
To facilitate enforcement actions against appraisers the department
identifies as not complying with requirements and who pose a risk to FHA's
mortgage insurance fund, HUD has, among other things, expanded the HOCs'
authority to sanction appraisers and developed a new appraisal scoring
system. A 2000 regulation authorized the HOCs to remove appraisers from
the appraiser roster. This authority, in conjunction with the adoption of
risk-based targeting of appraisers for review, has enabled HUD to increase
sanctions while decreasing the number of field reviews. For example,
according to HUD, the number of removal actions taken by the department
has increased from 25 in 1998 to 132 in 2003, while the number of field
reviews decreased from over 83,000 to 1,420. In 2002, HUD developed a
Web-based tool, the Appraisal Review Process, which 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.
HUD has also issued a final rule providing that lenders who submit
appraisals that do not meet HUD requirements are subject to the imposition
of sanctions.
This report makes recommendations designed to enhance HUD's processes for
implementing its risk-based appraiser oversight. We provided a draft of
this report to HUD for its review and comment. HUD agreed with three of
our four recommendations, but disagreed with some of our findings and
stated that our report does not recognize the significance of changes it
has made to appraiser oversight. We clarified one of our findings in
response to HUD's comments, but we believe the report appropriately
recognizes the changes made to HUD's appraiser oversight.
Background
Each year, HUD helps hundreds of thousands of Americans finance home
purchases by insuring their mortgage loans. HUD insures private lenders
against losses on mortgages for single-family homes-which HUD defines as
structures with one to four dwelling units-and plays a particularly large
role in certain market segments, including low-income borrowers and
first-time homebuyers. The loan amount that HUD can insure is based, in
part, on the appraised value of the home. The primary role of appraisals
in the loan underwriting process is to provide evidence that the
collateral value of the property is sufficient to avoid losses on loans if
the borrower is unable to repay the loan. If a borrower defaults and the
lender subsequently forecloses on the loan, the lender can file an
insurance claim with HUD for nearly all of its losses, including the
unpaid balance of the loan. After the claim is paid, the lender transfers
the title of the home to HUD, which is responsible for managing and
selling the property. Most of the mortgages are insured by FHA under its
Mutual Mortgage Insurance Fund. To cover claims for lenders' losses, FHA
deposits insurance premiums paid by borrowers into the fund, which,
historically, has been self-sufficient. Figure 1 shows the role appraisals
play as part of the home-buying process.
Figure 1: Appraisals as Part of the Home-Buying Process
As figure 1 indicates, the purpose of a HUD appraisal is to (1) determine
the property's eligibility for mortgage insurance on the basis of its
condition and location and (2) estimate the value of the property for
mortgage insurance purposes.6 In performing these tasks, the appraiser is
required to identify any readily observable deficiencies impairing the
safety, sanitation, structural soundness, and continued marketability of
the property and to assess the property's compliance with other minimum
standards and requirements.
HUD maintains a roster of appraisers who have satisfied the requirements
to be certified to perform HUD appraisals. Lenders underwriting mortgages
to be insured by HUD must select one of the approximately 26,000
appraisers listed on the appraiser roster to prepare an appraisal of the
mortgaged property. In fiscal year 2003, appraisers listed on HUD's roster
performed 902,118 appraisals for the purposes of HUD mortgage insurance.
HUD's oversight of appraisers who appraise properties with mortgages
insured by HUD is the responsibility of the Processing and Underwriting
Divisions at the four homeownership centers (HOCs). The HOCs are located
in Atlanta, Georgia; Denver, Colorado; Philadelphia, Pennsylvania; and
Santa Ana, California. Figure 2 below shows the distribution of appraisers
throughout the HOCs, each of which is responsible for a multistate region.
The HOCs report directly to HUD's Office of Single-Family Housing, which
is responsible for implementing HUD's home mortgage insurance programs and
maintaining the appraiser roster.
Figure 2: Map of United States Showing HOC Regions and the Number of
Appraisers in Each Region
Since the creation of the HOCs in 1998, their role with respect to HUD's
appraiser monitoring strategy has evolved. From fiscal year 1998 through
2000, HUD instructed the HOCs to perform random field reviews for at least
10 percent of all loans insured by HUD. Starting in fiscal year 2000,
HUD's Real Estate Assessment Center assumed the responsibility of
performing these field reviews for the HOCs and used an automated
system-the Single Family Appraiser Subsystem-to review the quality of
appraisals and identify those that were poorly prepared. However, HUD
discovered that the majority of the appraisals identified as poor simply
had documentation errors, and the system had failed to identify poorly
performing appraisers who contributed to losses to the FHA mortgage
insurance fund.
In April 1999, we reported on HUD's appraiser approval, monitoring, and
enforcement efforts. We noted that HUD had limited assurance that the
appraisers on its roster were knowledgeable about its appraisal
requirements. We also reported that HUD was not doing a good job of
monitoring the performance of appraisers and that HUD staff did not
routinely visit appraised properties to determine the accuracy of field
review contractors' observations. In addition, we observed that HUD was
not holding appraisers accountable for the quality of their appraisals and
that HUD had not aggressively enforced its policy to hold lenders equally
accountable with the appraisers they select for the accuracy and
thoroughness of appraisals.
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. In 1999, the department issued guidance that required appraisers
to, among other things, pass an examination on HUD appraisal methods and
reporting. In 2003, HUD also issued regulations making changes to the
licensing and certification requirements for the appraiser roster.
Although HUD has strengthened its criteria for approving appraisers to
perform appraisals, quality control over the approval process is limited.
Guidance and Regulations Are Designed to Help Ensure Competency of
Appraisers on FHA's Roster
In November 1999, HUD issued new guidance under its Homebuyer Protection
Plan-which was implemented in an attempt to increase the accuracy and
thoroughness of HUD appraisals performed as part of the home-buying
process-for placement and retention on the appraiser roster. As noted
previously, lenders underwriting HUD loans must select appraisers from
those listed on the roster to perform appraisals in connection with
FHA-insured mortgages. 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;7 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.8
In May 2003, HUD published a final rule making several additional changes
to the licensing and certification requirements for the roster.9
Specifically:
o An appraiser who was included on the roster in June 2003, but did not
meet the minimum Appraiser Qualifications Board licensing or certification
criteria had 12 months to comply with these criteria and submit evidence
of compliance to HUD. Failure to comply constituted cause for removal from
the roster.
o 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.
o An appraiser whose licensing or certification in a state has expired may
not conduct HUD appraisals in that state.
HUD does not formally recertify appraisers whose licenses or
certifications have expired or have been revoked. Instead, these functions
are performed at the state level, and HUD is notified electronically,
through an interface with state appraiser regulatory systems, to ensure
that appraisers have passed the appropriate exams and that licenses have
been renewed and through daily e-mails from the Appraisal Subcommittee to
learn when licenses have been revoked.10 HUD is seeking to establish an
electronic connection to the Appraisal Subcommittee, which would enable
automatic notification when appraisers are sanctioned by states and when
appraisers' licenses or certifications need to be renewed.
Quality Control for Placement of Appraisers on Roster Is Limited
While HUD strengthened the requirements for approving appraisers for
placement on the appraiser roster, quality control over approval
procedures is limited. According to HUD's guidance on placing new
appraisers on the roster, HUD valuation staff are supposed to verify
eligibility by checking (1) the Appraisal Subcommittee's National Registry
to ensure that the applicant is listed, (2) the General Services
Administration's Excluded Parties List System and HUD's Limited Denial of
Participation List to ensure that the applicant is not listed, and (3) the
Credit Alert Interactive Voice Response System to ensure that the
applicant's social security number is not associated with any defaults or
delinquencies in other federal loan programs.
We found that HUD's quality control for approving appraisers for placement
on the roster is limited. According to HUD officials, the employees
responsible for appraiser approval check to ensure the applications
include all relevant information, verify that applicants are eligible to
participate in HUD programs, and enter applicants' names into the
Computerized Homes Underwriting Management System. They perform the
eligibility verifications manually, checking the aforementioned registries
and lists to ensure that the applicant is appropriately listed. HUD
officials explained that they are developing a contract to establish a
system that will track these verifications. In addition, while HUD
officials indicated that they do perform quality control on the roster
placement procedures, this quality control is limited. A HUD official
conducts quality control reviews over a random sample of the approving
employees' work, but not on a routine basis. HUD does not document these
quality control reviews and could not provide evidence that they were
performed. HUD officials indicated that they are planning to develop and
implement a quality control plan for the appraiser approval process.
HUD Focuses on Appraisers with Known Risks to FHA's Mortgage Insurance
Fund, but Weaknesses Exist in Implementing These Efforts
HUD uses a risk-based targeting approach to identify appraisers for
review. HUD has shifted its focus from targeting appraisals to targeting
appraisers, modifying its approach in an attempt to more effectively
identify and monitor appraisers most associated with known risks to FHA's
mortgage insurance fund. The HOCs have generally reviewed the appraisers
targeted during fiscal year 2003 and the first half of fiscal year 2004,
but the reviews have not consistently met HUD's criteria for completeness.
In addition, HUD has not performed adequate oversight of contractors who
conduct field reviews of appraisals.
HUD Uses a Risk-Based Approach to Target Appraisers for Review
HUD's process for monitoring appraisers is risk based. In 1999, we
reported that HUD's guidance called for random reviews of 10 percent of
all appraisals. HUD modified this approach and now targets for review
appraisers who are associated with known risks to FHA's mortgage insurance
fund, including those associated with a large number of defaulted loans,
those who perform a large volume of appraisals, and those who appraise
properties for loans with characteristics that are associated with high
default and claim rates, including loans made under the 203(k)
rehabilitation program, loans with nonprofit mortgagors, and loans for
properties with multiple (three to four) units.11 HUD's new approach is
intended to identify poorly performing appraisers rather than poorly
prepared appraisals. The goal of this approach is to remove from the
appraiser roster appraisers who have not complied with HUD requirements
and therefore pose a risk to FHA's mortgage insurance fund, disqualifying
them from doing business with HUD.
The "early default rate" is the primary factor that HUD uses to identify
poorly performing appraisers. On a quarterly basis, each HOC first
identifies appraisers with the highest percentage of early defaults over
the last 12-month period. Early defaults are defined as those that occur
within 12 months of loan origination and represent a delinquency-which
occurs when the borrower is unable to honor the mortgage obligation-of 90
days or greater. Each HOC next identifies, from the pool of appraisers
associated with high early default rates, those appraisers who performed
10 or more appraisals and who performed appraisals for five or more
defaulted mortgages. To do this, HUD uses its Neighborhood Watch Early
Warning System-a Web-based software application that displays loan
performance data for lenders and appraisers by loan types and geographic
areas using FHA-insured single-family loan information-which was enhanced
to include summary and loan level appraiser data to enable the targeting
of appraisers for review. The system not only helps HUD target appraisers
associated with a high rate of early defaults but also provides HUD the
ability to identify and analyze patterns-by appraiser, geographic area, or
originating lender-in loans that go into early default.
According to HUD's guidance, each HOC must develop a target list of
appraisers to be reviewed based on the targeting criteria. They also must
review at least 30 appraisers each quarter, but these do not necessarily
need to be pulled from the target lists. In addition to selecting
appraisers using the targeting criteria, the HOCs also may review
appraisers for other reasons. For example, HOC officials informed us that
they also include on the targeting lists appraisers who have recently been
sanctioned and have completed their sanction period. The officials
indicated that this helps them to ensure that recently sanctioned
appraisers have corrected their relevant deficiencies and do not repeat
past performance problems. However, because this targeting criterion is
not required, there is no assurance that it will be used consistently. The
HOCs may also review appraisers based on complaints from homebuyers and
referrals from other HUD offices.
To help identify appraisers to be placed on the target lists, HUD has
recently implemented a statistical risk-based appraiser-sampling
algorithm. This algorithm helps to identify appraisers for desk and field
reviews, focusing on those who are more likely to be associated with
adverse outcomes, including (1) early default of an FHA insured loan, (2)
large dollar amount of claims on the FHA mortgage insurance fund, or (3)
severity of the net dollar loss on the FHA mortgage insurance fund. The
algorithm also incorporates risk factors statistically related to these
adverse outcomes, including appraiser workload, performance in high-risk
programs, and geographical area. According to HUD, this enhanced and
automated targeting helps to ensure the efficient use of resources for
field reviews.
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. The HOCs maintain general information about the reasons
why appraisers are targeted for review, specifically labeling the reasons
appraisers are targeted as "high default rate," "high volume," or
high-risk loans or properties. However, they do not maintain specific
early default rate information for the appraisers targeted, even though
early default rate is the primary factor behind HUD's targeting approach.
The Neighborhood Watch Early Warning system allows HUD officials to
maintain this information. For example, HUD uses this system to target
lenders participating in its Single-Family Mortgage Insurance programs for
review and maintains targeted lenders' early default information. However,
according to HOC officials, once the appraiser target lists are created,
the HOCs do not maintain the targeted appraisers' early default
information. Without the specific default rate information, we were unable
to determine whether the HOCs reviewed those targeted appraisers who posed
the greatest risk based on high default rate. More importantly, in the
absence of this information, HUD is unable to monitor the HOCs to ensure
that the appropriate appraisers were targeted and reviewed based on its
criteria and may be unable to determine the effectiveness of its targeting
criteria in reducing risk to the mortgage insurance fund.
HUD Reviewed Most Targeted Appraisers, but Reviews Were Not Always
Complete
Overall, the HOCs reviewed 730 (almost 78 percent) of the 936 appraisers
who were placed on the target lists during fiscal year 2003 and the first
half of fiscal year 2004.12 However, as shown in figure 3, the percentage
varied among the HOCs. Each HOC exceeded the goal of reviewing 30
appraisers per quarter. Specifically, they reviewed a total of 2,055
appraisers over this period, or an average of more than 85 appraisers per
HOC per quarter. (In addition to the 730 appraisers who were reviewed
because they were on the target lists, the HOCs reviewed 1,325 appraisers
who were not on the target lists but were reviewed based on other reasons,
including complaints from homebuyers and referrals from other HUD offices,
for a total of 2,055 appraisers reviewed.) HOC officials explained that
they are not always able to conduct reviews of the appraisers within the
quarter targeted because of resource constraints, but indicated that they
eventually perform reviews of all targeted appraisers.
Figure 3: Number of Appraisers Targeted and Reviewed by HOC
HUD's guidance calls for the HOCs to conduct desk reviews of 10 appraisals
prepared by each appraiser identified for review through the targeting
methodologies. The HOCs are to use a standard set of desk review criteria,
the focus of which is to identify deficiencies in the content and format
of the reported data. The appraisal report is to be analyzed for
reasonable and logical conclusions of value to determine if the appraisal
data are consistent with FHA requirements.
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. As shown in figure 4, the Philadelphia HOC was the only HOC that
conducted almost 10 desk reviews for each appraiser reviewed during this
period. Officials from the other HOCs explained that an appraiser might
have conducted fewer than 10 appraisals, and so the HOCs would be unable
to perform the required number of desk reviews. However, as noted earlier,
HUD's targeting criteria provide that from the pool of appraisers
associated with high early default rates, those appraisers performing 10
or more appraisals and with five or more defaulted cases should be
targeted.
Figure 4: Average Number of Desk Reviews Performed on Each Appraiser
Reviewed by HOC
HOC officials also told us that they attempt to perform desk reviews of
appraisals that were conducted no more than one year prior to the time of
the review and that, if possible, they try to perform these reviews on the
appraisers' 10 most recent appraisals. While this approach is not
required, HOC officials explained that it helps them to ensure that an
appraiser's most recent work is being reviewed and that appraisals are not
outdated at the time of review.
HUD Conducted Limited Oversight of Field Review Contractors
According to HUD guidance, if a desk review concludes that an appraisal is
inconsistent or unacceptable, then a field review is warranted on up to
five appraisals prepared by that appraiser. HUD uses contractors and HUD
employees who are qualified as appraisers to conduct field reviews. The
review consists of a comprehensive inspection of the subject property's
interior and exterior, with the reviewer reporting any readily observable
defective conditions (whereby the property does not meet minimum property
standards as laid out in HUD's guidance). The reviewer also must perform
an exterior inspection of the comparable properties-other recently sold
properties with similar features used to help the appraiser estimate the
value of the subject property-submitted in the original appraisal and must
verify all data reported by the original appraiser for the subject
property and comparables.
We found that HUD staff do not routinely visit appraised properties to
verify the work of the field review contractors. According to HUD
guidance, on-site monitoring reviews by HUD staff are essential for
high-risk program participants to the extent practicable. HUD officials
explained that they are constrained by limited travel resources and so are
not able to make on-site visits to properties. HUD officials agreed
contract oversight is important but indicated that it is often not cost
efficient to send employees on site to review contractors' work because
many of the department's contractors are responsible for reviewing only a
few properties. However, HUD officials indicated that they are planning to
develop a cost-efficient oversight mechanism.
HUD Has Expanded the Authority of the HOCs and Developed an Appraisal
Scoring System to Facilitate Enforcement Actions
Expanded authority giving HOCs the ability to sanction appraisers has
provided the HOCs with additional enforcement options. According to HUD
officials, by expanding their ability to sanction appraisers and by
focusing oversight on appraisers instead of appraisals, they are able to
effectively and efficiently impose sanctions on appraisers. 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. According to HUD, the system helps to make
the process of sanctioning appraisers more consistent. In addition, HUD
has issued a final rule to hold lenders accountable for poor appraisals.
Lenders who submit appraisals that do not meet HUD requirements are now
subject to the imposition of sanctions by the department.
Devolution of Authority and Risk-Based Targeting Assist HOCs in
Sanctioning Appraisers
In 2000, a HUD regulation expanded its ability to sanction appraisers at
the national level by giving the HOCs the authority to remove appraisers
from the roster.13 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.14 Prior to receiving this expanded authority,
the only enforcement tool at the HOCs' disposal was issuance of limited
denials of participation.15 However, the HOCs needed to refer limited
denials of participation to headquarters, and the sanctions were only
effective in the particular HOC's jurisdiction for a year. Currently, the
sanctions available to the HOCs include removal from the roster for 6 to12
months, removal from the roster in conjunction with education for 6 to12
months, education for up to 90 days, notices of deficiency, and limited
denials of participation.16 Other sanctions available to HUD through
headquarters include suspension-often used as a temporary measure to stop
an appraiser from doing business with HUD until a more serious action can
be taken-for up to 12 months or until the conclusion of legal or debarment
proceedings; debarment, which removes an appraiser from the FHA roster,
generally for up to 3 years; and civil and criminal penalties.17 In fiscal
year 2003 and first half of fiscal year 2004, HUD reports that it
suspended 14 appraisers from the roster and did not debar or impose civil
or criminal penalties on any appraisers. HUD officials stated that these
sanctions are harder to use and less timely so they focus their efforts on
those sanctions they can use at the HOC level. Figure 5 illustrates the
extent to which the department has made use of each type of enforcement
action available, as reported by HUD.
Figure 5: Number of Appraisers Field Reviewed Compared to Number and Types
of Sanctions Imposed during Fiscal Year 2003 and the First Half of Fiscal
Year 2004
In addition, HUD officials explained that by changing the oversight
approach to focus targeting efforts on appraisers instead of appraisals
they can now better focus oversight efforts on appraisers with known
risks. Specifically, they reported that they can now review a smaller
number of appraisers and use sanctions more effectively and efficiently.
For example, HUD reports that since 1998, the number of removal actions
taken by the department has increased, while the number of field reviews
and the cost to the agency have decreased, as shown in table 1.
Table 1: Number of Field Reviews Compared to Number of Removals, 1998-2003
Fiscal Year Number of field Number of appraisers Total costs of field
reviews removed reviews
1998 83,084 25 $10,773,605
1999a 135,674 32 $26,409,980
2000b 10,000 11 $15,378,082
2001 10,000 11 $15,378,082
2002 1,868 97 $300,000
2003 1,420 132 $255,000
Source: HUD.
aHUD provided field review data from 1999 for HOC appraisal reviews and
Real Estate Assessment Center appraisal reviews, because these centers
each contributed to the costs and numbers of field reviews as well as the
number of appraisers removed from the roster in 1999. However, the data
from the Real Estate Assessment Center was provided as a total for fiscal
year 1999 through December 2001, with 30,000 total field reviews
performed, 33 appraisers removed from the roster, and $46,134,248 in field
review costs for this period. We took the average of this 3-year period
and added this average to the 1999 Homeownership Center data in order to
arrive at the data reported for 1999.
bFor fiscal years 2000 and 2001, we used the average of the 3-year period
that was reported from the Real Estate Assessment Center data discussed
above.
Risk-Based Appraisal Scoring System Is Designed to Help Ensure Consistency
within and across HOCs
In 2002, HUD developed a monitoring and enforcement tool called the
Appraisal Review Process, a risk-based appraisal scoring system that
scores appraisers who are field reviewed. (Field-reviewed appraisers
include those targeted and field reviewed by HUD on a quarterly basis as
well as those who were not necessarily targeted but may have been field
reviewed for a variety of reasons, including complaints from home buyers
and referrals from other HUD offices.) In an attempt to ensure consistency
within and across HOCs, HUD designed this tool to (1) weigh each field
review question used to assess appraiser performance and (2) recommend
actions to be taken against appraisers.18 The tool provides the rater with
a systematic way of thoroughly examining the written appraisal and
carrying out the corresponding field review. Based on the desk and field
review data, the system yields a recommendation of removal, education, or
notice of deficiency. For example, questions associated with appraisal
factors that are considered to be of greater risk to the fund-such as the
accuracy of market value of the property and characterization of repair
conditions-receive a higher weight and automatically result in a removal
recommendation if the appraisal exceeds the maximum allowable points.
The Appraisal Review Process tool allows HUD to review appraisers and
impose sanctions on them in a systematic way. In 1999, we reported that
HUD was not holding appraisers accountable for the quality of their
appraisals and that the primary reason for HUD's inability to pursue
enforcement actions against poorly performing appraisers was poor record
keeping. According to HUD officials, the Appraisal Review Process's
systematic approach to reviewing appraisers' work and maintaining
electronic records of appraisers' performance has helped the HOCs maintain
better documentation. The data manager at each HOC orders cases for each
of the targeted appraisers and assigns them to a desk reviewer. Based on
the results of the desk review, the desk reviewer can decide that a field
review for a particular appraisal is warranted or that no further action
is necessary. If a field review is warranted, the appraisal is assigned to
a contractor or HUD employee, who measures the quality and accuracy of
appraisers' performance in the completion of the desk-reviewed appraisal
and up to four other appraisals prepared by the targeted appraiser and
inputs the results electronically into the Appraisal Review Process. Based
on the desk and field review data, the system yields a recommendation of
removal, education, or notice of deficiency. A HUD rater then looks at the
field review score generated by the system, factors in past performance
and results from other appraisals, and recommends a proposed action. The
branch chief must concur before the appraiser is notified of the action,
at which point the appraiser has 20 days to appeal. Figure 6 portrays the
major steps of the Appraisal Review Process.
Figure 6: Appraisal Review Process Flow Chart
According to HUD's guidance, once a recommended action is affirmed, the
appraiser roster is updated to reflect the change. If the appraiser is
removed from the roster, lenders cannot assign cases to the appraiser
until the appraiser is reinstated. Further, if the appraiser violated any
of the laws in the state in which the appraiser is licensed, then the
appropriate state regulatory agency is notified.
Recent Rule Is Designed to Hold Lenders Accountable for Poor Appraisals
In 1999, we recommended that HUD determine its authority to hold lenders
accountable for poor-quality HUD appraisals performed by the appraisers
they select from the roster and issue policy guidance that sets forth the
specific circumstances under which and actions by which HUD may exercise
this authority. In July 2004, HUD issued a final rule clarifying lenders'
accountability for the quality of appraisals on properties securing
FHA-insured mortgages. Specifically, the rule provides that lenders who
submit appraisals that do not meet HUD requirements are subject to the
imposition of sanctions by the department. The rule applies to both
sponsor lenders, who underwrite loans, and loan correspondents, who
originate loans on behalf of sponsor lenders. HUD believes these changes
will help ensure better compliance with appraisal standards and ensure
that homebuyers receive an accurate statement of appraised value.
Conclusions
The importance of accurate appraisals to HUD's Single-Family Mortgage
Insurance programs underscores the need for effective appraiser oversight.
HUD relies on appraisals to ensure that the billions of dollars in
mortgage loans it insures annually accurately reflect the value of the
homes being mortgaged. 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. However, certain weaknesses in implementing
these initiatives limit their ability to (1) lower HUD's risk of insuring
properties that are overvalued and (2) minimize potential losses to FHA's
mortgage insurance fund. Thus, opportunities exist to enhance HUD's
appraiser approval and monitoring efforts.
HUD's process for verifying that appraisers meet all relevant criteria
when applying for placement on its roster lacks effective quality control.
An effective control process is essential for HUD to systematically assure
and demonstrate that all eligibility criteria are verified with respect to
appraisers applying for placement on the roster so they can perform
appraisals in connection with HUD's Single-Family Mortgage Insurance
programs.
Further, while HUD's guidance specifies criteria for targeting appraisers
based on a set of known risk factors, it does not require the HOCs to
target for review appraisers who have been recently sanctioned, even
though the HOCs sometimes do so in order to ensure that the problem for
which the appraiser was sanctioned has been resolved. Requiring this
criterion for targeting appraisers for review could help assure that
sanctioned appraisers will not repeat past performance problems.
Similarly, HUD does not require that the HOCs maintain historical
information, particularly data on the associated default rates of loans,
used to target and select appraisers for review. Without this information,
HUD cannot demonstrate that the appropriate appraisers are being
systematically targeted and reviewed based on its criteria and may be
unable to determine the effectiveness of its targeting criteria in
reducing risk to the mortgage insurance fund.
HUD rarely verifies the work of its field review contractors through
on-site evaluations, weakening the department's ability to ensure that
contracted work is actually performed and to accurately assess the quality
of the appraisals used to support the loans the department insures. While
it entails costs, on-site monitoring is an essential part of any
monitoring process and is an important way to verify that work is actually
being conducted and to accurately assess the quality of appraisals.
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
o institute reasonable controls on the process of placing appraisers on
the appraiser roster to ensure that applicants' conformance to eligibility
criteria is verified;
o 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;
o 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
o implement a cost-effective field review contractor oversight process
that includes on-site monitoring.
Agency Comments
We provided a draft of this report to HUD for its review and comment. In
written comments from HUD's Assistant Secretary for Housing-Federal
Housing Commissioner, HUD agreed with three of our four recommendations,
but disagreed with our presentation of its accomplishments as well as some
of our findings. The full text of HUD's comments appears in appendix II.
HUD agreed with three of our recommendations. Specifically, it agreed to
consider a requirement to include, when targeting appraisers for review,
those appraisers who have recently completed a sanction period. Also, the
department agreed to modify its system to archive quarterly reports in
response to our recommendation that it maintain the historical information
used to target appraisers for review. Further, it agreed to consider
implementing a cost-effective field review contractor oversight process
that includes on-site monitoring.
However, HUD disagreed with our recommendation that it institute
reasonable controls on the process of placing appraisers on the appraiser
roster. HUD commented that our report inaccurately stated that HUD does
not document all verifications of appraisers' eligibility for the roster
and has limited quality control over the approval process, noting that the
department has a paper record of the application review process whereby
each applicant's eligibility is verified and documented. HUD also noted
that we did not review its paper records of the application review
process. We modified the report to clarify that our primary concern was
quality control, in general, and not solely documentation. We did not
review the paper files because it was not our objective to test whether or
not specific verifications had been performed, but rather to examine the
overall verification and documentation procedures HUD relies on to ensure
that appraisers meet its criteria. In doing so we observed a control
weakness and we modified the report to clarify this weakness.
Specifically, a HUD official conducts quality control reviews over a
random sample of the approving employees' work, but not on a routine
basis. Also, HUD does not document these quality control reviews and could
not provide evidence that they were performed. At a meeting to discuss the
results of our review, HUD's acting Deputy Assistant Secretary for
Single-Family Housing and the Director of the Office of Single-Family
Program Development agreed that they do not systematically document that
all of the verifications have been conducted and explained that they are
developing a contract to establish a system that will track these
verifications. They also indicated that they are planning to develop and
implement a quality control plan for the appraiser approval process. We
modified the recommendation to emphasize that HUD should institute
reasonable quality controls on the process of placing appraisers on the
appraiser roster.
HUD commented that while we acknowledged that it implemented policy and
procedural changes, we did not recognize the significance of these
changes, and that it is appropriate and necessary for our report to
clearly present and highlight these significant achievements. While we
agree that HUD has made significant improvements, our objectives concern
HUD's appraiser oversight as it currently exists, regardless of past
weaknesses. Nevertheless, we noted a number of specific improvements in
the draft report. Specifically, we noted that the number of removal
actions taken by the department has increased, while the number of field
reviews and the cost to the agency have decreased, as represented in table
1. 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 addition, we reported that the department issued
guidance that required appraisers to, among other things, pass an
examination on HUD appraisal methods and reporting. We also noted that HUD
issued several rules and mortgagee letters to strengthen its oversight and
control of appraisers and improve appraisal quality.
HUD also disagreed with the accuracy of some of our findings.
Specifically, HUD characterized as inaccurate our statement that in the
absence of historical early default rate information, the department may
be unable to determine the effectiveness of its appraiser targeting
criteria in reducing risk to the mortgage insurance fund. HUD explained
that its system directly targets the appraisers that pose the greatest
risk to the fund. We concur that HUD's process is designed to so target,
and our draft characterized the approach as risk based and described the
specific criteria HUD's process calls for to target appraisers for review.
However, because the HOCs do not maintain a permanent record of the data
showing which appraisers met the criteria in each quarter, we could not
verify that the appraisers the HOCs placed on their target lists were
actually those that met HUD's criteria. Similarly, without these records,
HUD is unable to determine whether the HOCs reviewed those appraisers who
met the criteria. 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. HUD went on to say that FHA would modify its
system to archive quarterly reports in order to maintain the historical
targeting records.
In addition, HUD disagreed that it conducted limited oversight of field
review contractors and that such efforts are affected by limited travel
resources. HUD explained that it conducts a 100 percent review of
contractors' work and that the HOCs do not conduct on-site reviews (which
may require travel resources) because the 100 percent review method serves
as an appropriate and effective risk-control measure. As we noted in our
report, HUD's guidance states that on-site monitoring reviews by HUD staff
are essential for high-risk program participants to the extent
practicable. Further, HOC officials told us that they are constrained by
limited travel resources and so are not able to make on-site visits to
properties. At a meeting to discuss the results of our review, HUD's
acting Deputy Assistant Secretary for Single-Family Housing and the
Director of the Office of Single-Family Program Development agreed that
contract oversight is important but indicated that it is often not cost
efficient to send employees on site to review contractors' work because
many of the department's contractors are responsible for reviewing only a
few properties. However, as we reported in our draft, these officials
indicated that they are planning to develop a cost-efficient oversight
mechanism.
Finally, HUD disagreed with our conclusion that weaknesses in implementing
its appraiser oversight initiatives limit the department's ability to (1)
lower its risk of insuring properties that are overvalued and (2) minimize
potential losses to FHA's mortgage insurance fund. HUD also stated that
our recommendations would not affect FHA's risk. As we stated in the draft
report, we did not attempt to estimate the impact that HUD's appraiser
oversight has on the financial health of FHA's mortgage insurance fund.
While we agree that HUD's new targeting methodology is intended to reduce
risks to FHA, our concern is whether the methodology is operating as
intended. Our recommendations relate to the implementation of processes
that are directed at controlling and minimizing risk and we continue to
believe that opportunities exist to enhance HUD's appraiser approval and
monitoring.
We are sending copies of this report to the Secretary of HUD. We will also
make copies available to others upon request. In addition, the report will
be available at no charge on the GAO Web site at http://www.gao.gov.
Should you or your staff have questions or comments on matters discussed
in this report, please contact me at (202) 512-6878 or [email protected], or
Paul Schmidt, Assistant Director, at (312) 220-7681 or [email protected].
Major contributors to this report are listed in appendix III.
David G. Wood Director, Financial Markets and Community Investment
Scope and MethodologyAppendix I
To examine how HUD ensures that appraisers it approves to perform
appraisals under its Single-Family Mortgage Insurance programs are
qualified to be placed on the appraiser roster, we reviewed pertinent HUD
regulations and policy guidance and the minimum licensing criteria
established by the Appraiser Qualifications Board of the Appraisal
Foundation. In addition, we discussed this information with officials from
HUD's Single-Family Housing Office of Program Development. Further, we met
with the staff member responsible for maintaining the FHA appraiser roster
and observed the process for adding approved appraisers to the roster.
To assess the extent to which HUD uses a risk-based approach when
monitoring appraisers, we interviewed officials at the four HOCs and
observed a demonstration of their quarterly targeting procedures. We
reviewed HUD's risk-based targeting guidance and obtained data for fiscal
year 2003 through the first half of fiscal year 2004 from each of the
HOCs. We then compared each of the HOCs' appraiser target lists to their
desk and field review lists to determine the number of targeted appraisers
that were actually reviewed. Further, from each of the HOCs' desk review
lists, we calculated the numbers of desk reviews performed by the HOCs on
each appraiser reviewed in order to assess whether the HOCs have been
following HUD's guidance.
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. We also discussed enforcement issues with officials from HUD's
Office of Single-Family Housing and the Departmental Enforcement Center.
At the HOCs, we discussed the Appraisal Review Process and the HOCs'
ability to sanction appraisers. We obtained data generated from the
Appraisal Review Report on HUD's sanctions imposed between fiscal year
2003 and the first half of fiscal year 2004 and compared this data to the
number of field reviews conducted during the same time period. We focused
this analysis on removals because removals are the strongest type of
action that can be taken at the HOC level.
We assessed the reliability of the HUD data we used by reviewing
information about how the data were collected, and we interviewed HUD
officials to determine the completeness and accuracy of the data provided.
We performed electronic testing on the data elements used for our analysis
to detect obvious errors in completeness and reasonableness. We determined
that these data were sufficiently reliable for the purposes of this
report.
Finally, we discussed appraiser oversight issues with officials from the
Appraisal Subcommittee, the Appraisal Foundation, the Appraisal Institute,
the Federal Home Loan Mortgage Corporation, and the Federal National
Mortgage Association.
We performed our work from December 2003 through August 2004 in accordance
with generally accepted government auditing standards.
Comments from the Department of Housing and Urban DevelopmentAppendix II
GAO Contacts and Staff AcknowledgmentsAppendix III
GAO Contacts
David G. Wood, (202) 512-6878 Paul Schmidt, (312) 220-7681
Staff Acknowledgments
Staff members who made key contributions to this report include Eric
Diamant, Mark Egger, Harold Fulk, Nadine Garrick, Curtis Groves, John
McGrail, Mark Molino, Josephine Perez, David Pittman, Terry Richardson,
and Paige Smith.
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