Single-Family Housing: Weaknesses in HUD's Oversight of the FHA Appraisal
Process (Letter Report, 04/16/99, GAO/RCED-99-72).

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.

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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-72
     TITLE:  Single-Family Housing: Weaknesses in HUD's Oversight of
	     the FHA Appraisal Process
      DATE:  04/16/99
   SUBJECT:  Appraisals
	     Mortgage programs
	     Mortgage protection insurance
	     Performance measures
	     Quality assurance
	     Reporting requirements
	     Fair market value
	     Lending institutions
	     Accountability
	     Contract oversight
IDENTIFIER:  HUD 2020 Management Reform Plan
	     HUD Homeowner Protection Plan

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SINGLE-FAMILY HOUSING: Weaknesses in HUD's Oversight of the FHA
Appraisal Process GAO/RCED-99-72 United States General Accounting
Office

GAO Report to the Chairman, Subcommittee on Housing and Community
Opportunity,

Committee on Banking and Financial Services, House of
Representatives

April 1999 SINGLE- FAMILY HOUSING Weaknesses in HUD's Oversight of
the FHA Appraisal Process

GAO/RCED-99-72

  GAO/RCED-99-72

GAO United States General Accounting Office

Washington, D. C. 20548 Resources, Community, and Economic
Development Division

B-280899 April 16, 1999 The Honorable Rick A. Lazio Chairman,
Subcommittee on Housing

and Community Opportunity Committee on Banking

and Financial Services House of Representatives

Dear Mr. Chairman: Numerous allegations and complaints about the
poor quality of appraisals conducted for the purposes of mortgage
insurance issued by the Department of Housing and Urban
Development's (HUD) Federal Housing Administration (FHA) have
raised concerns about the FHA appraisal process. Appraisals
influence the loan amounts that FHA insures, and incomplete or
inaccurate appraisals resulting in overvaluations may expose FHA
to greater financial risks. In fiscal year 1998, HUD insured
mortgage loans for single- family housing totaling approximately
$100 billion.

In May 1998, we reported on the quality of FHA appraisals for nine
homes in New Jersey and Ohio that a group of appraisers selected
to illustrate their concerns about the completeness of some FHA
appraisals. 1 We noted that the appraisal reports for eight of the
nine properties did not reflect conditions we observed that could
adversely affect the structural soundness and continued
marketability of the houses and the health and safety of the
occupants. We also reported that HUD's field offices did not
adequately monitor the performance of the appraisers of these
properties. In light of these problems, you asked us to conduct a
broad assessment of HUD's oversight of the FHA appraisal process.

This report provides information on the following questions: (1)
How well is HUD monitoring the performance of the appraisers on
its roster and implementing procedures for addressing consumers'
complaints about 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?
However, we did not estimate the impact that HUD's oversight

1 Appraisals for FHA Single- Family Loans: Information on Selected
Properties in New Jersey and Ohio (GAO/RCED-98-145R, May 6, 1998).

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 1

B-280899

of the appraisal process might have on the financial health of
FHA's mortgage insurance fund.

To address these issues, we focused on the activities of HUD's
headquarters and its Philadelphia and Denver homeownership centers
(HOC). HUD established four HOCs to administer the single- family
housing functions formerly performed by its 81 field offices.
Together, the Philadelphia and Denver HOCs account for about half
of FHA's single- family home loan activity.

Results in Brief HUD is not doing a good job of monitoring the
performance of appraisers. On- site evaluations of completed
appraisals, known as field reviews, are

HUD's principal tool for assessing the quality of appraisers'
work. In fiscal year 1998, HUD performed about 81,000 of these
reviews, but three of the four HUD homeownership centers did not
meet HUD's requirement to field review no less than 10 percent of
the FHA appraisals performed within their jurisdictions. Of the
12,076 appraisers who performed 10 or more appraisals between
October 1, 1997, and June 30, 1998, 4,465, or 37 percent, had not
been field reviewed. Although HUD's guidance states that
timeliness is essential to ensure quality field reviews, half of
the field reviews conducted in fiscal year 1998 did not occur
until more than 2 months after the appraisals had been performed.
Moreover, HUD did not learn about problems with some appraisals
until after it had already approved mortgage insurance for the
properties. The Philadelphia and Denver homeownership centers'
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. In 37 of the 96 cases, the field reviews
were performed after mortgage insurance had been approved. In
addition, HUD staff did not routinely visit appraised properties
to determine the accuracy of the field review contractors'
observations. Finally, the Philadelphia and Denver homeownership
centers did not fully implement guidance on the handling and
tracking of consumers' complaints, including those relating to
appraisals.

HUD is not holding appraisers accountable for the quality of their
appraisals. 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. A poor field
review score indicates that the appraiser made errors and
omissions that could result in an unacceptable insurance risk to
FHA. During the first three quarters of fiscal year 1998, 246 of
the 5,768 field reviewed appraisers within the

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 2

B-280899

Philadelphia and Denver homeownership centers' jurisdictions
received two or more poor field review scores, but only 11 of the
appraisers were prohibited from doing subsequent FHA appraisals.
Poor record- keeping by HUD's field offices was the primary reason
for the centers' inability to pursue enforcement actions against
other poorly performing appraisers.

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 disagreement
within HUD over its authority to do so. In May 1998, the
Philadelphia Homeownership Center requested that HUD's Mortgagee
Review Board 2 impose administrative sanctions against a lender
who refused the center's request to correct property deficiencies
that the appraiser had overlooked. However, the Board never
reviewed or acted on this request because the Board's staff did
not believe that HUD had the authority to hold the lender
accountable for the quality of the appraisal simply because the
lender had selected the appraiser. As a result, the homeownership
centers have been reluctant to refer similar cases to the Board.

HUD has limited assurance that the appraisers on its roster are
knowledgeable about FHA's appraisal requirements. 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. 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.

This report makes recommendations designed to improve HUD's
process for assessing completed FHA appraisals and to clarify the
Department's authority to hold lenders accountable for poor-
quality appraisals.

Background Each year, FHA helps hundreds of thousands of Americans
finance home purchases. Established under the National Housing
Act, FHA insures

private lenders against losses on mortgages for single- family
homes. FHA plays a particularly large role in certain market
segments, including low- income borrowers and first- time
homebuyers. The loan amount that FHA can insure is based, in part,
on the appraised value of the home. If a borrower defaults and the
lender subsequently forecloses on the loan, the

2 The Mortgagee Review Board is the entity within HUD that can
impose administrative sanctions against a lender, withdraw a
lender's authority to make FHA- insured loans, or both.

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 3

B-280899

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 to 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 (Fund). To cover lenders' losses, FHA deposits insurance
premiums paid by borrowers in the Fund and historically, the Fund
has been self- sufficient.

The purpose of an FHA 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. In performing these tasks, the
appraiser is required to identify any visible deficiencies
impairing the safety, sanitation, structural soundness, and
continued marketability of the property and to assess the
property's compliance with FHA's other minimum property standards.
According to HUD's guidance, if an appraiser finds noncompliance
with these standards, the appraiser should include in the
appraisal report an appropriate and specific action to correct the
deficiency.

Private mortgage lenders making FHA- insured loans for single-
family housing are required to select appraisers from FHA's roster
of about 31,500 state- licensed or -certified appraisers. In
fiscal year 1998, 825,539 appraisals were performed for the
purposes of FHA mortgage insurance. Ninety- six percent of these
appraisals were for existing homes, while the remaining 4 percent
were for newly constructed homes.

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 conducting a field review, a
HUD staff person or contractor visits the appraised property to
evaluate all aspects of the appraisal, including whether the value
determination was reasonable and whether all needed repairs were
identified. 3 The field reviewer is required to document his or
her findings on a standard HUD form and recommend a score using a
scale from 1 to 5 (with 1 being unacceptable and 5 being
excellent).

As part of its 2020 Management Reform Plan announced in 1997, HUD
consolidated the single- family housing activities of its 81 field
offices into four HOCs, each of which is responsible for a
multistate area. These activities include processing mortgage
insurance and functions related to

3 The responsibility for selecting appraisals for field review,
overseeing field review contractors, and determining the final
field review scores was transferred from HUD's 81 field offices to
its four HOCs between February and December 1998.

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 4

B-280899

HUD's oversight of appraisers and lenders participating in FHA's
programs. The HOCs are located in Denver, Colorado; Atlanta,
Georgia; Philadelphia, Pennsylvania; and Santa Ana, California,
and report directly to HUD's Office of Insured Single- Family
Housing, which is responsible for implementing FHA's home mortgage
insurance program. The consolidation of activities into the four
HOCs was carried out in phases and was completed in December 1998.
HUD has also established two new offices, the Real Estate
Assessment Center and the Enforcement Center, which are expected
to play important roles in HUD's oversight of the FHA appraisal
process. According to HUD officials, the Assessment Center's
responsibilities will include analyzing and tracking appraisal
quality and appraiser performance, and the Enforcement Center's
responsibilities will include sanctioning appraisers, mortgage
brokers, and lenders who do not comply with HUD's requirements.

On June 1, 1998, HUD announced a Homebuyer Protection Plan that
outlined reforms that HUD intends to make to the FHA appraisal
process. Specifically, the plan (1) requires that appraisals
include a more thorough basic survey of the physical condition of
homes; (2) requires lenders to inform potential homebuyers of
defects found during appraisals; (3) requires appraisers to
recommend complete, detailed inspections of homes if the
appraisers find significant problems with the properties; (4)
allows up to $300 of home inspection costs to be financed through
FHA mortgages; and (5) imposes stricter accountability on
appraisers and tougher sanctions on those who act improperly,
including fines and potential prison sentences. HUD's announcement
did not identify a specific timetable for implementing the plan.

HUD's Monitoring of Appraisers Is Limited

HUD is not doing a good job of monitoring the performance of
appraisers, thereby limiting the agency's ability to assess the
quality of appraisals used for FHA- insured loans. 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. In addition,
HUD's records for the first three quarters of fiscal year 1998
showed that over one- third of the appraisers who conducted 10 or
more appraisals during that period did not have any of their work
field reviewed. When field reviews were performed, many were not
timely. At the HOCs we visited, we found that HUD staff did not
routinely visit appraised properties to verify the work of field
review contractors and that they lacked adequate systems for
tracking consumers' complaints about appraisals.

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B-280899

Weaknesses Exist in Field Review Coverage

In September 1997, HUD established a policy requiring its HOCs and
field offices to field review no less than 10 percent of the
appraisals conducted within their jurisdictions. HUD instituted
this requirement in response to our July 1997 report, which showed
that some HUD field offices were conducting few or no field
reviews of appraisals. 4 An official from HUD's Office of Insured
Single- Family Housing told us that once HUD consolidated its
single- family housing activities into the four HOCs, the 10-
percent standard no longer applied to HUD's 81 field offices. Our
analysis of HUD's data showed that three of the four HOCs did not
meet the 10- percent requirement in fiscal year 1998.
Specifically, the Philadelphia, Denver, and Santa Ana HOCs
reviewed 9.7, 8.3, and 8.1 percent of the total appraisals
performed in their jurisdictions, respectively. The Atlanta HOC
field reviewed 12.7 percent of the appraisals in its jurisdiction.

Many Appraisers With Significant Workloads Were Not Field Reviewed

HUD did not field review the work of thousands of appraisers who
conducted 10 or more FHA appraisals during the period from October
1, 1997, through June 30, 1998. Our analysis showed that 25,560
appraisers performed FHA appraisals during that period. Of the
12,076 appraisers who performed 10 or more appraisals during that
period, 4,465, or 37 percent, had not been field reviewed. Among
these 4,465 appraisers, 49 percent had conducted between 10 and 19
appraisals, 20 percent had conducted between 20 and 29 appraisals,
and 31 percent had conducted 30 or more appraisals. (See fig. 1.)
While HUD's procedures do not require field reviews for appraisers
doing a higher volume of appraisals, HUD had little assurance that
they were conducting accurate and thorough appraisals without
performance information on these individuals.

4 Homeownership: Information on Changes in FHA's New Single-
Family Appraisal Process (GAO/RCED-97-176, July 25, 1997).

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 6

B-280899

Figure 1: Appraisers Who Conducted 10 or More Appraisals Between
October 1, 1997, and June 30, 1998, and Were Not Field Reviewed

49%  10 to 19 appraisals (2,174)

20%

20 to 29 appraisals (889)

31%

30 or more appraisals (1,402) Source: GAO's analysis of data from
HUD.

Philadelphia and Denver HOC officials told us that several factors
contributed to problems with field review coverage. These factors
included (1) HUD's reliance on contractors to conduct field
reviews and the unavailability of contract funds during the first
several months of the fiscal year; (2) the reassignment of
personnel during HUD's reorganization, which, in some instances,
left no one responsible for ordering field reviews; and (3) the
lack of emphasis that some field offices placed on field reviews
once they knew their functions would be transferred to the HOCs.
HOC officials told us that they had placed a high priority on
completing field reviews when they assumed this responsibility
from the field offices but that they were constrained by the
amount of time remaining in the fiscal year and the limitations on
the number of field reviews that they could ask contractors to
perform each month.

As of February 1999, HUD was piloting a new process for selecting
appraisals for field review. HUD plans to use statistical analysis
of appraisal quality indicators (e. g., the completeness and
mathematical accuracy of the appraisal report) to identify
appraisals that may be problematic and,

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 7

B-280899

therefore, may be candidates for field review. According to HUD,
this new process will allow the Department to target appraisers
who may be performing poorly for field review instead of relying
on the more random process now being used.

Many Field Reviews Were Not Timely

Although HUD's guidance states that timeliness is essential to
ensure the quality of field reviews, a procedural change that HUD
implemented in November 1997 has significantly reduced the
timeliness of these reviews. Prior to November 1997, appraisers
were required to send copies of their appraisal reports directly
to HUD. This arrangement allowed HUD to field review some
appraisals before the lenders closed on the loans and sent the
remaining loan documents to HUD for approval of FHA mortgage
insurance. However, effective November 1997, appraisers are no
longer required to send their appraisal reports to HUD, and HUD
does not get a copy of the appraisal report until the lender
closes the loan and sends the appraisal report to HUD as part of
the loan case file. According to HUD officials, the intent of this
change was to reduce the amount of paperwork coming into the HOCs.
HUD officials also told us that planned computer system
enhancements would have allowed the HOCs to receive a sample of
lenders' appraisals prior to loan closing. However, the officials
said these enhancements had been delayed because of work
priorities relating to year 2000 compliance issues.

HUD's records showed that half of the field reviews conducted in
fiscal year 1998 were not done until at least 77 days after the
appraisal had been performed. In six of HUD's field office
jurisdictions, the corresponding figure was 140 days or more. In
contrast, HUD reported in fiscal year 1997 that all field reviews
were being completed within 45 days of the appraisals.

Philadelphia and Denver HOC officials told us that the reduced
timeliness of field reviews made it difficult to prevent the
approval of FHA mortgage insurance for loans based on faulty
appraisals and reduced the usefulness of field review reports as a
monitoring and enforcement tool. 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. In 37 of the 96 cases,
the field reviews were performed after HUD had already approved
mortgage insurance for the properties. We also noted one case in
which the field reviewer gave the appraisal a score of 2, in part
because the appraiser had overlooked

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B-280899

several repair conditions, including areas of the foundation in
need of repair and defective paint surfaces. A Philadelphia HOC
official raised the score to a 3 because the field review was
performed 5 months after the appraisal and some of the conditions
needing repair could have developed during that intervening
period.

Oversight of Field Review Contractors Was Limited

HUD relies primarily on licensed appraisers under contract with
HUD to conduct field reviews of completed appraisals. About three-
fourths of the 80,958 field reviews conducted in fiscal year 1998
were performed by contractors, while the remainder were performed
by HUD staff. At HUD's Philadelphia and Denver HOCs, we found that
the staff did not routinely verify the observations of field
review contractors or systematically evaluate the contractors'
performance as required.

HUD's policy guidance stresses the importance of evaluating the
work of field review contractors and states that 5 percent of
every contractor's work should be reviewed and rated on scale from
1 to 5 (with 1 being unacceptable and 5 being excellent). The
purpose of this rating system is to document performance problems
and justify disciplinary actions against field review contractors,
if necessary. Although HUD's guidance is unclear on this point, an
official from HUD's Office of Insured Single- Family Housing told
us that the review process was supposed to include a visit by HUD
staff to properties the contractors had field reviewed. Officials
at both the Philadelphia and Denver HOCs told us that they rarely
conducted such evaluations because they lacked sufficient staff
and travel resources. They said that, as a result, they neither
tracked the percentage of each contractor's work that received an
on- site review nor evaluated the contractors' performance using
the numerical rating system.

According to HUD, the HOCs are currently administering over 250
small field review contracts, most of which they inherited from
the field offices as the work from the field offices was
consolidated under the HOCs. Because HUD has found it difficult to
monitor such a large number of contracts, the agency is planning
to contract out the field review function to a small number of
large appraisal firms. It also plans to have HUD staff perform
quality assurance reviews of the contractors.

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B-280899

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. In a December 1997 policy memorandum,
HUD's Deputy Assistant Secretary for Single- Family Housing
required the HOCs to establish written consumer complaint
procedures and to maintain certain types of information about the
complaints they received, including those relating to appraisals.
During our visits to the Philadelphia and Denver HOCs, we found
that the centers had yet to develop written complaint procedures.
In October 1998, HUD officials told us that the Philadelphia HOC
was developing a set of written procedures for all four HOCs to
follow. We also found that the Philadelphia and Denver HOCs did
not have complaint tracking systems that contained all of the
information required by the December 1997 policy memorandum. Both
HOCs maintained logs showing, among other things, the HOC official
assigned to follow up on a complaint and the date the follow- up
action was completed. However, these logs did not include other
required information, such as the nature of the complaint, the
actions taken to address the complaint, or the final disposition
of the complaint. This information would enable the HOCs'
management to readily determine the frequency of different types
of complaints and ensure that all complaints are being resolved in
an appropriate manner.

Few Poorly Performing Appraisers Were Sanctioned

Contrary to HUD's policy, most appraisers within the Philadelphia
and Denver HOCs' jurisdictions who received two or more poor
ratings in field reviews during the first three quarters of fiscal
year 1998 were allowed to continue performing appraisals for FHA.
Of the 5,768 appraisers within the two HOCs' jurisdictions who
were field reviewed during this period, 246 received two or more
poor field review scores. HUD prohibited only 11 of these
appraisers from conducting further FHA appraisals. Poor record-
keeping by HUD's field offices and other factors hampered the
HOCs' ability to take enforcement actions against other poorly
performing appraisers.

HUD's Policy Calls for Sanctioning Poorly Performing Appraisers

HUD's policy states that appraisers who receive two or more poor
scores in field reviews during any 12- month period should be
temporarily prohibited from conducting further FHA appraisals. A
poor field review rating (i. e., a score of 1 or 2 on a scale of 1
to 5) indicates that the appraiser did not adequately support the
value assigned to the home, overlooked serious repair conditions,
or made other errors and omissions that could result in an
unacceptable insurance risk to FHA. HUD's HOCs may impose an

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B-280899

administrative sanction, called a limited denial of participation,
that excludes an appraiser from participating in FHA programs for
up to a year. 5

Numerous Appraisers Received Two or More Poor Scores in Field
Reviews

Our analysis of field review results recorded in HUD's
Computerized Homes Underwriting Management System (CHUMS) showed
that 205 appraisers within the Philadelphia HOC's jurisdiction and
41 appraisers within the Denver HOC's jurisdiction received two or
more poor scores in field reviews during the period from October
1, 1997, through June 30, 1998. These 246 appraisers accounted for
about 19,100, or 6 percent, of the approximately 303,000 FHA
appraisals performed during this period in the two HOCs'
jurisdictions. These appraisers combined had 749 field reviews in
which they received scores of 1 or 2. A separate analysis by HUD's
Office of Insured Single- Family Housing indicated that this
problem was not limited to the Philadelphia and Denver HOCs. HUD's
analysis showed that between May 1997 and May 1998, a total of 723
appraisers nationwide had received two or more poor scores in
field reviews but were still active members of HUD's appraiser
roster.

As of October 1, 1998, HUD had taken enforcement actions against
11 of the 246 appraisers we reviewed and prohibited them from
performing FHA appraisals, in most cases for up to a year. Of the
11 enforcement actions, 5 were taken by the Philadelphia HOC, 3 by
the Denver HOC, and 1 each by HUD's Delaware, Montana, and Utah
field offices. Of the appraisers we reviewed who were not subject
to enforcement actions, several had received a substantial number
of poor field review scores. For example, one Buffalo- area
appraiser received poor scores in 9 field reviews, and a Detroit-
area appraiser received poor scores in 22 field reviews.

As of October 1, 1998, the two HOCs had taken enforcement actions
against 12 other appraisers who were not among the 246 appraisers
we reviewed.

Missing Documentation Impeded Enforcement Efforts

HUD's policy is to sanction appraisers only when there is
substantial evidence and documentation of performance that is less
than acceptable. Philadelphia and Denver HOC officials told us
that their efforts to sanction appraisers had been hampered
primarily by a lack of supporting documentation. They said that
other factors that impeded their enforcement efforts were the age
of some of the field reviews and the lack

5 Procedures for limited denials of participation afford the
appraiser the opportunity for a hearing before a departmental
hearing officer. Therefore, to issue a limited denial of
participation, the HOCs must obtain concurrence from the Office of
General Counsel at both the field office and headquarters levels.

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of evidence that the appraisers had been given the chance to
appeal the poor field review ratings.

At the Philadelphia HOC, we reviewed the files for 72 of the 205
appraisers who received two or more poor field review scores,
including at least one score of 1, during the period from October
1, 1997, through June 30, 1998, to determine the basis for these
scores. At the Denver HOC, we reviewed the files for all 41
appraisers who received two or more poor field review scores
during the same period. HUD's field offices began transferring
these files to the HOCs in February 1998.

We found at both the Philadelphia and Denver HOCs that most of the
field review reports that supported the poor field review scores
recorded in HUD's CHUMS were not in the appraisers' files. At the
Philadelphia HOC, we found that 196, or 65 percent, of the 301
poor ratings were not documented by field review reports in the
files. As a result, the HOC's files contained documentation of two
or more poor scores for just 31 of the 72 appraisers we reviewed.
For 8 of those 31 appraisers, the documentation showed that HUD
officials had raised one or more of the field review scores, with
the result that these appraisers no longer had two or more poor
scores for the period we reviewed. 6 At the Denver HOC, we found
that 66 of the 101 poor ratings were not documented by field
review reports in the files. Consequently, the HOC had
documentation of two or more poor scores for only 16 of the 41
appraisers we reviewed.

HOC officials told us that the appraiser files they had received
from certain HUD field offices were incomplete, reflecting the
poor record- keeping and lax enforcement efforts of these offices
before and during the consolidation of HUD's single- family
housing activities. Philadelphia and Denver HOC officials told us
that they would continue to monitor the performance of appraisers
who had received poor scores in the past. Both HOCs have
established appraiser files to document and maintain the results
of field reviews and are developing computerized information
systems to track appraisers' field review scores, in accordance
with HUD's policy guidance.

Of the 126 field review reports we found in the two HOCs' files
that assigned poor scores to the appraisers we reviewed, 76, or 60
percent, cited problems with the appraisers' valuation of the
properties. Figure 2 shows the percentage of the field review
reports that cited certain types of

6 In accordance with HUD's procedures, HUD officials raised the
scores after reviewing the field review reports and, in some
cases, additional information provided by the appraisers. The
officials determined that the poor scores were not justified in
these cases.

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deficiencies in the appraisals. In most cases, the field reviews
found more than one type of deficiency in each appraisal.

Figure 2: Reasons Cited in Field Review Reports for Poor Field
Review Scores

Percentage of reports 0 5

10 15

20 25

30 35

40 45

50 55

60 65

Unreasonableproperty value Incorrect propertydescription

Missed orinappropriate repairconditions Incorrect sitedescription

Incorrectneighborhooddescription Inappropriate salescomparables

Unreasonable landvalue Other (e. g., incorrectform used)

Source: GAO's analysis of data from HUD.

As part of its Homebuyer Protection Plan, HUD is revising its
guidance for sanctioning appraisers. The guidance includes a
matrix that shows the appropriate enforcement actions, including
civil and criminal penalties, associated with various infractions
of HUD's appraisal policies and standards. The HOCs and HUD's
Enforcement Center will share the responsibility for taking
enforcement actions against appraisers. According to HUD, the
process of issuing limited denials of participation to remove
appraisers from FHA's roster can be difficult and time- consuming.
As a result, HUD is drafting regulations that, if approved, would
enable its HOCs to remove poorly performing appraisers from FHA's
roster more easily.

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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. In May
1998, the Philadelphia HOC requested that HUD's Mortgagee Review
Board sanction a lender who refused to correct property
deficiencies that the appraiser had overlooked. This was the first
case of this type that had been referred to the Board. However,
the Board never reviewed or acted on this request because the
Board's staff did not believe that HUD had the authority to hold a
lender accountable for the quality of an appraisal simply because
the lender selected the appraiser. As a result, the HOCs have been
reluctant to refer similar cases to the Board.

HUD's Policy on Lenders' Accountability for Appraisals

In October 1994, HUD issued regulations implementing a legislative
provision that allowed lenders to choose the appraisers of
properties to be insured by FHA. 7 While the legislation did not
address this issue, HUD's regulations stated that lenders who
selected their own appraisers were equally responsible, along with
the appraisers, for the accuracy, integrity, and thoroughness of
the appraisals. In May 1996, HUD repealed these regulations as
part of a larger federal effort to reduce regulations. According
to HUD, the regulations were not necessary because many of the
standards in the regulations were already in HUD's handbook
guidance and mortgagee letters issued to lenders.

HUD issued mortgagee letters to lenders in November 1994 and again
in May and November of 1997 that reiterated its policy that
lenders were equally responsible for the quality of appraisals.
Also, in a December 1997 policy memorandum, HUD's Deputy Assistant
Secretary for Single- Family Housing instructed HUD staff that in
cases in which appraisers missed serious repair conditions or
significantly overvalued properties, HUD should request that the
lenders who selected the appraisers pay for the needed repairs or
pay down the mortgages by the amounts the properties were
overvalued. The Deputy Assistant Secretary also indicated that the
failure of a lender to voluntarily resolve the appraisal
deficiencies raised by HUD would result in enforcement action
against the lender, including probation and suspension.

7 Section 322 of the Cranston- Gonzalez National Affordable
Housing Act of 1990 amended section 202( e) of the National
Housing Act, allowing lenders to choose the appraisers of
properties for which mortgages are to be insured by FHA.

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Pennsylvania Case Raises Questions About HUD's Authority to Hold
Lenders Accountable for Appraisals

In September 1997, a Pennsylvania homeowner complained to the
Philadelphia HOC that an independent inspection of her FHA-
insured home had found numerous violations of FHA's minimum
property standards that she believed should have been identified
by the appraiser. A subsequent HUD field review confirmed that the
appraiser had missed repairs that were necessary to correct health
and safety problems with the home. In January 1998, the
Philadelphia HOC temporarily suspended the appraiser and
prohibited him from taking further FHA appraisal assignments for
90 days. In addition, the HOC sent a letter to the Pennsylvania
mortgage company that had selected the appraiser, requesting that
the lender either make approximately $7,500 in repairs to the home
or prepay the mortgage by that amount.

In April 1998, attorneys for the lender informed HUD by letter
that the lender had declined to pay for the repairs or prepay the
mortgage. 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.

Because of the lender's refusal to make the repairs or to prepay
the mortgage as requested, the Philadelphia HOC in May 1998
referred the case to the Mortgagee Review Board for appropriate
action against the lender. The Board is the entity within HUD that
can impose administrative sanctions against a lender or withdraw a
lender's authority to make FHA- insured loans. However, the Board
never reviewed this case. In discussing this case with the Board's
Secretary and the Deputy Chief Counsel for HUD's Enforcement
Center, we were told that the Board's staff did not forward the
HOC's referral to the Board because the staff did not believe that
HUD had the authority to hold lenders liable for the actions of
independent appraisers simply because the lenders had selected the
appraisers. According to the Deputy Chief Counsel, the
Philadelphia HOC had no authority to assess the lender $7,500
because this constituted a civil penalty against the lender and
only the Board had the authority to assess such penalties. While
the Deputy Chief Counsel noted that there were circumstances in
which HUD could hold lenders accountable for the work of
appraisers, both he and the Board's Secretary indicated that HUD's
policy, as written, was improperly attempting to hold lenders
absolutely liable for the work of appraisers selected by the
lenders. The Board's

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Secretary told us that he would soon draft a response to the
Philadelphia HOC about the referral, but as of January 1999, no
response had been prepared.

The Director of the Philadelphia HOC told us that he would like
the Board to either sustain HUD's policy of holding lenders
responsible for appraisals or rule that HUD does not have such
authority. He said that the HOC had two other cases that it would
like to refer to the Board, including one in which another lender
had also refused the HOC's request to pay for repair conditions
missed by the appraiser. The Director said he saw no benefit in
forwarding other cases to the Board until it has made a decision
on the HOC's first referral. In October 1998, officials at the
Denver HOC told us that they had not referred any lenders to the
Board for using poor- quality appraisals, in part, because it was
difficult to know where to lay the blame in such cases and that
the issue had not been tested in court. They said a lender would
vigorously fight any sanctions imposed on it for relying on a
faulty appraisal because of the precedent such an action would
set.

HUD Has Limited Assurance That Appraisers Are Familiar With FHA's
Requirements

HUD has limited assurance that the appraisers on FHA's roster are
knowledgeable of FHA's appraisal requirements. 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.

HUD's Eligibility Requirements for Appraisers

To be eligible for FHA's roster, appraisers must be state-
licensed or -certified in accordance with the minimum criteria
established by the Appraiser Qualifications Board of the Appraisal
Foundation. 8 The Qualifications Board's minimum licensing
criteria require that appraisers have 90 hours of classroom
education in subjects related to real- estate appraisals, have
2,000 hours of appraisal experience, and pass the Qualifications
Board's endorsed examination or an equivalent examination. To be
placed on FHA's roster, an appraiser must submit an application
and a copy of his or her license or certification to the HOC
within whose jurisdiction the appraiser intends to work. The
appraiser must certify on the application form that he or she has
read or will read

8 The Appraisal Foundation is a not- for- profit educational
organization established in 1987. In 1989, the Financial
Institutions Reform, Recovery, and Enforcement Act adopted the
Appraiser Qualifications Board's qualification criteria for
professional appraisers.

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HUD's handbook on valuation analysis before accepting an FHA
appraisal assignment.

HUD's CHUMS contains licensing information for the appraisers on
FHA's roster. Our analysis of the appraisal license expiration
dates in CHUMS indicated that the approximately 31,500 appraisers
on FHA's roster as of August 1998 held current licenses or
certifications. In addition, using a national database maintained
by the Appraisal Subcommittee of the Federal Financial
Institutions Examination Council, we confirmed that the 246
Philadelphia and Denver HOC appraisers who received poor field
review scores held current licenses.

At the time HUD adopted its procedures for allowing lenders to
select their own appraisers in 1994, it recognized that appraisers
would need training in FHA's appraisal requirements and
procedures. Unlike appraisals for conventional mortgages,
appraisals for FHA- insured mortgages must include an assessment
of the properties' compliance with FHA's property standards as
well as appropriate and specific actions to correct conditions not
in compliance with these standards. In addition, the value an
appraiser assigns to a property must reflect its value with all
the required repairs completed. While HUD encouraged its field
offices and local appraiser and lender associations to sponsor
training in FHA appraisals, it decided not to make training a
condition for placement on FHA's roster. HUD decided to rely
instead on lenders' selecting only knowledgeable appraisers and on
appraisers' not accepting appraisal assignments that they were not
competent to perform.

HUD Is Revising Its Appraisal Forms and Guidance

In conjunction with its Homebuyer Protection Plan, HUD is
developing a new appraisal report to record the results of
appraisals. HUD believes that this report will provide more
information about the physical condition of the appraised property
than HUD's current appraisal forms and will allow the appraiser to
better identify health and safety hazards and structural problems
that may require repairs. The new report lists specific physical
conditions that the appraiser should check for and requires the
appraiser to recommend whether a complete home inspection or some
other type of inspection (e. g., electrical, roofing, or
structural) should be conducted. HUD will require lenders to
provide a summary of the report to homebuyers so that homebuyers
will have information about needed repairs and recommended
inspections.

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HUD has also drafted revised handbook guidance for appraising
single- family homes. The handbook updates and consolidates
information currently fragmented among numerous HUD handbooks and
mortgagee letters. The draft handbook clarifies the roles and
responsibilities of the appraiser, outlines protocols for
appraisers to follow when conducting FHA appraisals, and specifies
sanctions HUD will take against poorly performing appraisers. HUD
expects to finalize and issue the handbook in April 1999.

HUD is also in the process of adopting a requirement that
appraisers pass a test on FHA appraisal requirements and
procedures to be eligible to perform FHA appraisals. HUD plans to
begin testing in June 1999.

Conclusions The importance of appraisals to FHA and prospective
homeowners underscores the need for effective oversight of the
appraisal process. FHA

relies on appraisals to ensure that the billions of dollars in
mortgage loans it insures annually accurately reflect the value of
the homes being purchased. FHA homebuyers rely on appraisals, in
part, to avoid buying homes with major defects that are costly to
fix. However, weaknesses in HUD's oversight of the FHA appraisal
process have increased FHA's risk of insuring properties that are
overvalued or whose owners may default on their FHA- insured loans
because of unexpected repair costs. The consequence of this
increased risk is higher potential losses to FHA's insurance fund.

HUD could significantly improve its monitoring of appraisers. HUD
has not ensured that the HOCs are meeting the agency's
requirements to field review 10 percent of all FHA appraisals.
Also, HUD's procedures do not target for field review appraisers
who perform significant numbers of FHA appraisals. 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. Moreover, the two HOCs we visited did not
regularly verify the work of field review contractors through on-
site evaluations and lacked tracking systems necessary to readily
determine the nature, frequency, and resolution of complaints from
FHA homebuyers. These problems weaken HUD's ability to accurately
assess the quality of the appraisals used to support the loans FHA
insures.

HUD's ability to sanction poorly performing appraisers was
seriously impaired by the loss or misplacement of records prior to
and during HUD's field consolidation. Consequently, hundreds of
appraisers whose work

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may be creating an unreasonable underwriting risk for FHA continue
to conduct appraisals for FHA- insured mortgages. However, the two
HOCs we visited have taken steps toward enforcing FHA's
performance standards for appraisers.

HUD has not resolved internal disagreements about its authority
and policy to hold lenders accountable for poor- quality
appraisals. As a result, it has not aggressively enforced this
policy. By not resolving this issue, HUD is sending a confusing
message to both lenders and FHA borrowers about who is responsible
for the quality of appraisals and what remedies exist when an
appraisal is unsatisfactory.

HUD's reliance on the states' licensing process and self-
certification provide limited assurance that the appraisers on
FHA's roster are knowledgeable of FHA's appraisal requirements.
The states' minimum licensing standards do not require proficiency
in FHA's guidelines, and HUD is considering, but has not
implemented, its own testing requirement. HUD's revision of its
appraisal guidance and forms and its plans to test appraisers on
their knowledge of FHA appraisal requirements are likely to help
appraisers perform their work in accordance with FHA standards.

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.

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To improve HUD's oversight of lenders participating in FHA's
programs, we recommend that the Secretary of HUD (1) determine the
Department's authority to hold FHA- approved lenders accountable
for poor- quality FHA appraisals performed by the appraisers they
select from FHA's roster and (2) issue policy guidance that sets
forth the specific circumstances under which and actions by which
HUD may exercise this authority.

Agency Comments We provided a draft copy of this report to HUD for
its review and comment. In its letter commenting on the report,
HUD said that the report did not

describe the changes the Department had made to FHA's single-
family mortgage insurance programs. HUD indicated that, prior to
our report, FHA management had already identified appraisal
quality as an area needing improvement and had announced a
Homebuyer Protection Plan to address this problem. Because the
report contains ample discussion of the Department's Homebuyer
Protection Plan and other steps HUD has taken to improve the FHA
appraisal process, we did not make any changes to the report.

In commenting on our recommendation that HUD achieve better field
review coverage of FHA's appraiser roster, HUD indicated that it
will implement a revised field review process by July 1, 1999,
that will improve the Department's sampling and targeting of
appraisers for field review. In response to our recommendation
that HUD conduct on- site evaluations of a portion of each field
review contractor's work, HUD indicated that it would begin
performing supervisory reviews of field review contractors in
conjunction with a national field review contract scheduled to
begin in July 1999. Regarding our recommendation that HUD
determine its authority to hold FHA- approved lenders accountable
for poor- quality appraisals, HUD responded that it would target
for monitoring those lenders that used poorly performing
appraisers. Because HUD's response did not address the
Department's authority to hold FHA- approved lenders accountable
for poor- quality appraisals, we believe that HUD still needs to
clarify this matter and issue policy guidance that reflects this
clarification.

HUD disagreed with our recommendation to improve the timeliness of
appraisal field reviews by obtaining copies of the appraisal
reports and performing field reviews prior to loan closings and
the approval of FHA mortgage insurance. HUD indicated that the
collection of all appraisals and the performance of field reviews
before the approval of mortgage insurance would be impractical and
inconsistent with HUD's Direct

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Endorsement Program, which allows qualified mortgagees to process
and close FHA loans without prior review by HUD. We modified this
recommendation to reflect the fact that it may be difficult for
HUD to field review appraisals before the lenders close on the
loans. However, we continue to believe that it would be feasible
for HUD to field review, in advance of approving mortgage
insurance, those appraisals that the Department has selected for
field review. For example, HUD could require lenders to submit
copies of selected appraisal reports immediately after the
Department makes the selections rather than waiting for the
lenders to include the appraisal reports as part of the loan files
sent to HUD prior to the endorsement of mortgage insurance. We
believe that such a procedure would not infringe on the
underwriting responsibilities of Direct Endorsement lenders and
would improve the quality and usefulness of field reviews by (1)
significantly reducing the time elapsed between appraisals and the
field reviews of those appraisals and (2) reducing HUD's risk of
insuring mortgages based on faulty appraisals.

The full text of HUD's letter is presented in appendix I. Scope
and Methodology

We conducted our work at HUD's headquarters and its Philadelphia
and Denver HOCs. Together, the two HOCs account for about half of
FHA's loan activity for single- family housing. We interviewed
officials from HUD's Office of Insured Single- Family Housing,
Real Estate Assessment Center, Enforcement Center, Mortgagee
Review Board, and Philadelphia and Denver HOCs. We reviewed laws,
regulations, mortgagee letters, and other documents related to the
FHA appraisal process and developed information on HUD's
procedures for monitoring appraisers, overseeing field review
contractors, and handling consumers' complaints. We analyzed data
from HUD's CHUMS for information on the currency of appraisal
licenses for appraisers on FHA's roster and the number of
appraisers who received two or more poor scores in field reviews
during the first three quarters of fiscal year 1998. We reviewed
HOCs' files for documentation of field review scores, information
on enforcement actions against appraisers and lenders, and on the
nature of consumers' complaints. Appendix II provides additional
details on our scope and methodology.

We performed this review from May 1998 through April 1999 in
accordance with generally accepted government auditing standards.

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As arranged with your office, unless you publicly release its
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter. At that time, we will
send copies of this report to Representative Barney Frank, Ranking
Minority Member, House Subcommittee on Housing and Community
Opportunity; Representative James A. Leach, Chairman, and John J.
LaFalce, Ranking Minority Member, House Committee on Banking and
Financial Services; and Senator Phil Gram, Chairman, and Paul S.
Sarbanes, Ranking Minority Member, Senate Committee on Banking,
Housing, and Urban Affairs. We will also send copies of this
report to The Honorable Andrew M. Cuomo, Secretary of HUD; The
Honorable William C. Apgar, HUD Assistant Secretary for Housing-
Federal Housing Commissioner; and The Honorable Jacob J. Lew,
Director, Office of Management and Budget. We will make copies
available to others upon request.

Please call me at (202) 512- 7631 if you or your staff have any
questions. Major contributors to this report were Paul Schmidt,
Steve Westley, Jackie Garza, Stan Ritchick, Mitch Karpman, and
John McGrail.

Sincerely yours, Judy A. England- Joseph Director, Housing and
Community

Development Issues

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Contents Letter 1 Appendix I Comments From the Department of
Housing and Urban Development

26 Appendix II Objectives, Scope, and Methodology

30 Figures Figure 1: Appraisers Who Conducted 10 or More
Appraisals

Between October 1, 1997, and June 30, 1998, and Were Not Field
Reviewed

7 Figure 2: Reasons Cited in Field Review Reports for Poor Field

Review Scores 13

Abbreviations

CHUMS Computerized Homes Underwriting Management System FHA
Federal Housing Administration HOC homeownership center HUD
Department of Housing and Urban Development

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Appendix I Comments From the Department of Housing and Urban
Development

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 26

Appendix I Comments From the Department of Housing and Urban
Development

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 27

Appendix I Comments From the Department of Housing and Urban
Development

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 28

Appendix I Comments From the Department of Housing and Urban
Development

GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 29

Appendix II 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 assess how well HUD was monitoring the performance of
appraisers, we reviewed pertinent HUD handbook and policy guidance
and discussed this information with officials from HUD's Office of
Insured Single- Family Housing. We reviewed HUD appraisal and
field review data for fiscal year 1998 and determined the extent
to which HUD's four homeownership centers (HOC) field reviewed at
least 10 percent of their appraisals, as required by HUD. We
analyzed field review data in HUD's Computerized Homes
Underwriting Management System (CHUMS) to determine for the first
9 months of fiscal year 1998 how many appraisers nationwide that
conducted 10 or more appraisals were subject to at least one field
review and how many did not have any of their work field reviewed
during the period. In addition, we reviewed CHUMS data for fiscal
year 1998 on the median amount of time elapsed between appraisals
and the field reviews of those appraisals. We interviewed Denver
and Philadelphia HOC officials about factors affecting their
ability to monitor appraisers and oversee field review
contractors. We also discussed with Real Estate Assessment Center
officials the planned changes to HUD's procedures for tracking and
evaluating the performance of appraisers. In addition, we
interviewed Denver and Philadelphia HOC officials responsible for
handling FHA consumer complaints and reviewed consumer complaint
logs and files maintained by the centers.

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. For the period from October 1, 1997, through June 30,
1998, we examined the field review data in HUD's CHUMS for the
appraisers working in the Philadelphia and Denver HOCs'
jurisdictions and identified those appraisers who received two or
more poor scores (i. e., scores of 1 or 2 on a scale of 1 to 5) in
field reviews during that period. At the Philadelphia and Denver
HOCs, we reviewed the files for the 72 and 41 appraisers,
respectively, who fell into that category. In reviewing these
files, we determined (1) whether the poor

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Appendix II Objectives, Scope, and Methodology

field review scores recorded in CHUMS were documented in field
review reports and (2) whether the HOCs had prohibited the
appraisers from conducting further FHA appraisals. We interviewed
officials at the Denver and Philadelphia HOCs about factors that
affected their ability to sanction poorly performing appraisers.

To determine the extent to which HUD was holding lenders
responsible for the quality of the FHA appraisals they used, we
reviewed pertinent legislation, HUD regulations, mortgagee
letters, and policy guidance. We also reviewed correspondence
between HUD and mortgage lenders regarding specific cases of
faulty appraisals. In addition, we interviewed officials from
HUD's Denver and Philadelphia HOCs and from its Mortgagee Review
Board and Enforcement Center about HUD's authority to hold lenders
accountable for poor- quality appraisals.

To determine how HUD ensures that appraisers on FHA's roster are
qualified, we reviewed pertinent HUD regulations and policy
guidance and the minimum licensing criteria established by the
Appraiser Qualifications Board of the Appraisal Foundation. We
interviewed officials from HUD's Office of Single- Family Housing
and its Real Estate Assessment Center and reviewed revised
appraisal guidance being developed by HUD for information on the
changes planned to HUD's appraiser eligibility requirements. We
analyzed appraiser license expiration dates in HUD's CHUMS to
determine whether the approximately 31,500 appraisers on FHA's
appraiser roster as of August 1998 held current appraiser
licenses. We also verified the licensing information in CHUMS for
the 246 appraisers in the Philadelphia and Denver HOCs'
jurisdictions who had received two or more poor scores in field
reviews during the period from October 1, 1997, through June 30,
1998, with licensing data maintained by the Appraisal Subcommittee
of the Federal Financial Institutions Examination Council.

(385738) GAO/RCED-99-72 HUD's Oversight of FHA Appraisals Page 31

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