Homeownership

Since December 1994, private mortgage lenders making single-family mortgage loans insured through the Federal Housing Administration (FHA) have been able to select any licensed or certified appraiser on FHA's roster to determine the value of homes. Previously, FHA assigned appraisers to lenders. Appraisals have an influence on the amount of the mortgage loan, and if a borrower defaults and the loan is later foreclosed, lenders can recover losses from FHA, including the unpaid principal balance of the loan. According to some former FHA appraisers, allowing lenders to select appraisers has exposed FHA to greater financial risk because some appraisals being done today are incomplete, inaccurate, and favorable to the lender. This report provides information on (1) how appraisals of FHA-insured single-family homes were assigned before December 1994, who assigned the appraisal work, and why the appraisal assignment process changed; (2) what the reactions have been to this change from former FHA appraisers, FHA, and FHA lenders; and (3) what problems have been identified by the Department of Housing and Urban Development since the introduction of the new appraisal assignment process.

GAO noted that: (1) prior to December 1994, houses that were being appraised for FHA-insured home loans were appraised by FHA fee panel appraisers who were assigned on a rotational basis to lenders, and, in turn, lenders paid the fee panel appraisers for their services; (2) HUD's field offices had approximately 6,000 FHA fee panel appraisers to conduct the appraisals; (3) legislation was enacted in 1990 that allowed FHA's single-family lenders rather than FHA to choose the appraisers of properties whose loans were to be insured by FHA; (4) according to its history, this legislation was enacted to: (a) improve the efficiency of FHA lenders who would no longer have to rely on HUD's field office staff to assign appraisers; and (b) improve the quality and reliability of appraisal services for HUD's mortgage assistance and other housing programs by promoting uniform eligibility standards for those performing federal appraisals; (5) in January 1996, FHA informed its lenders that effective March 1, 1996, they had to select appraisers from FHA's roster of about 31,000 state-licensed or certified appraisers; (6) HUD also allowed lenders to use their in-house appraisers if they were on the roster and assigned by the lender; (7) those most directly affected by the change were particularly opposed to the change, charging that the appraisals now being performed were inaccurate, incomplete, or favorable to lenders; (8) FHA's appraisal manager and four FHA lenders cited, among other things, improved timeliness and quality of appraisals and a decrease in the number of HUD field office staff needed to administer the appraisal process as the reasons they support allowing lenders to select appraisers; (9) HUD has identified two problems--the lack of reviews for completed appraisals by staff in some HUD field offices and the decline in the number of women and minority appraisers selected by lenders--since the implementation of the new appraiser selection process; (10) the private accounting firm hired by HUD to conduct a financial audit of the agency found that the Los Angeles field office had not performed any required field reviews of completed appraisals in fiscal year 1996; (11) in addition, FHA's records show that 6 other HUD field offices had conducted few or no field reviews of completed appraisals from October 1, 1996, to June 20, 1997; and (12) HUD is currently reviewing various strategies aimed at resolving the problem of women and minority appraisers not being selected to perform a proportionate number of FHA appraisals.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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