Single-Family Housing
HUD's Risk-Based Oversight of Appraisers Could Be Enhanced Gao ID: GAO-05-14 November 5, 2004Incomplete 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.
Through new guidance and regulation, HUD has strengthened its criteria for placing appraisers on its appraiser roster--which establishes their eligibility to participate in HUD programs. Before 1999, HUD relied largely on the states' licensing processes to ensure that appraisers were qualified, but the states' minimum licensing standards did not specifically include proficiency in HUD's appraisal requirements. HUD's 1999 guidance requires appraisers to, among other things, pass an examination on HUD appraisal methods and reporting. Further, a 2003 regulation provides for, among other things, removing from the roster appraisers whose licenses have been suspended or revoked. However, HUD has limited quality control over the approval process, limiting the department's assurance that its criteria are being effectively implemented. HUD has adopted an oversight approach that focuses on appraisers it believes pose risks to FHA's mortgage insurance fund, but certain weaknesses exist in its implementation. HUD's guidance calls for its homeownership centers (HOCs)--which are largely responsible for appraiser oversight--to develop quarterly targeting lists of appraisers for review based on certain criteria, or risk factors. The primary factor is the rate of defaults in certain loans associated with the appraiser; others include large numbers of appraisals as well as appraisals for loans made under one of HUD's programs known to be at higher risk of fraud and abuse. However, the HOCs do not maintain a permanent record of the data used to identify the targeted appraisers--even though HUD's automated system would enable them to--which limits HUD's ability to verify that those targeted were those that met the criteria and to determine the effectiveness of its targeting criteria in reducing risk to the mortgage insurance fund. GAO found that during fiscal year 2003 and the first half of fiscal year 2004 the HOCs generally reviewed the appraisers they identified as high risk and targeted for review. However, they reviewed fewer appraisals for each targeted appraiser than HUD's guidance prescribes: on average, about 5.6 appraisals instead of the 10 called for. GAO also found that HOC staff did not routinely visit appraised properties to verify the work of contractors whoconduct field reviews of selected appraisers. To facilitate enforcement actions against appraisers, HUD expanded the HOCs' authority to sanction appraisers and developed a new appraisal scoring system. According to HUD, the number of actions taken to remove appraisers from its roster has increased from 25 at a cost of over $10 million in 1998 to 132 at a cost of under $300,000 in 2003. HUD also developed a tool 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, this tool allows the department to sanction appraisers more consistently.
RecommendationsOur 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.
Director: Team: Phone:GAO-05-14, Single-Family Housing: HUD's Risk-Based Oversight of Appraisers Could Be Enhanced
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Report to Congressional Addressees:
November 2004:
SINGLE-FAMILY HOUSING:
HUD's Risk-Based Oversight of Appraisers Could Be Enhanced:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-14]:
GAO Highlights:
Highlights of GAO-05-14, a report to congressional addressees.
Why GAO Did This Study:
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 3.7 million 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.
What GAO Found:
Through new guidance and regulation, HUD has strengthened its criteria
for placing appraisers on its appraiser roster”which establishes their
eligibility to participate in HUD programs. Before 1999, HUD relied
largely on the states‘ licensing processes to ensure that appraisers
were qualified, but the states‘ minimum licensing standards did not
specifically include proficiency in HUD‘s appraisal requirements. HUD‘s
1999 guidance requires appraisers to, among other things, pass an
examination on HUD appraisal methods and reporting. Further, a 2003
regulation provides for, among other things, removing from the roster
appraisers whose licenses have been suspended or revoked. However, HUD
has limited quality control over the approval process, limiting the
department‘s assurance that its criteria are being effectively
implemented.
HUD has adopted an oversight approach that focuses on appraisers it
believes pose risks to FHA‘s mortgage insurance fund, but certain
weaknesses exist in its implementation. HUD‘s guidance calls for its
homeownership centers (HOCs)”which are largely responsible for
appraiser oversight”to develop quarterly targeting lists of appraisers
for review based on certain criteria, or risk factors. The primary
factor is the rate of defaults in certain loans associated with the
appraiser; others include large numbers of appraisals as well as
appraisals for loans made under one of HUD‘s programs known to be at
higher risk of fraud and abuse. However, the HOCs do not maintain a
permanent record of the data used to identify the targeted appraisers”
even though HUD‘s automated system would enable them to”which limits
HUD‘s ability to verify that those targeted were those that met the
criteria and to determine the effectiveness of its targeting criteria
in reducing risk to the mortgage insurance fund. GAO found that during
fiscal year 2003 and the first half of fiscal year 2004 the HOCs
generally reviewed the appraisers they identified as high risk and
targeted for review. However, they reviewed fewer appraisals for each
targeted appraiser than HUD‘s guidance prescribes: on average, about
5.6 appraisals instead of the 10 called for. GAO also found that HOC
staff did not routinely visit appraised properties to verify the work
of contractors who conduct field reviews of selected appraisers.
To facilitate enforcement actions against appraisers, HUD expanded the
HOCs‘ authority to sanction appraisers and developed a new appraisal
scoring system. According to HUD, the number of actions taken to remove
appraisers from its roster has increased from 25 at a cost of over $10
million in 1998 to 132 at a cost of under $300,000 in 2003. HUD also
developed a tool 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, this tool allows
the department to sanction appraisers more consistently.
What GAO Recommends:
GAO is making four recommendations aimed at enhancing HUD‘s appraiser
oversight processes. In responding to a draft of this report, HUD
agreed with three of these recommendations, but disagreed with the
presentation of its accomplishments as well as some of the findings.
www.gao.gov/cgi-bin/getrpt?GAO-05-14.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David G. Wood at (202)
512-6878 or woodd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
HUD Has Strengthened Its Criteria for Placing Appraisers on Its Roster,
but Has Limited Assurance that These Criteria Are Being Implemented:
HUD Focuses on Appraisers with Known Risks to FHA's Mortgage Insurance
Fund, but Weaknesses Exist in Implementing These Efforts:
HUD Has Expanded the Authority of the HOCs and Developed an Appraisal
Scoring System to Facilitate Enforcement Actions:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Housing and Urban
Development:
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Table:
Table 1: Number of Field Reviews Compared to Number of Removals, 1998-
2003:
Figures:
Figure 1: Appraisals as Part of the Home-Buying Process:
Figure 2: Map of United States Showing HOC Regions and the Number of
Appraisers in Each Region:
Figure 3: Number of Appraisers Targeted and Reviewed by HOC:
Figure 4: Average Number of Desk Reviews Performed on Each Appraiser
Reviewed by HOC:
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:
Figure 6: Appraisal Review Process Flow Chart:
Abbreviations:
FHA: Federal Housing Administration:
GAO: Government Accountability Office:
HOC: homeownership centers:
HUD: Department of Housing and Urban Development:
Letter November 5, 2004:
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.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote
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;[Footnote 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:
[See PDF for image]
[End of figure]
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.[Footnote 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:
[See PDF for image]
[End of figure]
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;[Footnote 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.[Footnote
8]:
In May 2003, HUD published a final rule making several additional
changes to the licensing and certification requirements for the
roster.[Footnote 9] Specifically:
* 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.
* 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.
* 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.[Footnote 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.[Footnote 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.[Footnote 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:
[See PDF for image]
[End of figure]
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:
[See PDF for image]
[End of figure]
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.[Footnote 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.[Footnote 14]
Prior to receiving this expanded authority, the only enforcement tool
at the HOCs' disposal was issuance of limited denials of
participation.[Footnote 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.[Footnote 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.[Footnote 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:
[See PDF for image]
[End of figure]
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: 1998;
Number of field reviews: 83,084;
Number of appraisers removed: 25;
Total costs of field reviews: $10,773,605.
Fiscal Year: 1999[A];
Number of field reviews: 135,674;
Number of appraisers removed: 32;
Total costs of field reviews: $26,409,980.
Fiscal Year: 2000[B];
Number of field reviews: 10,000;
Number of appraisers removed: 11;
Total costs of field reviews: $15,378,082.
Fiscal Year: 2001;
Number of field reviews: 10,000;
Number of appraisers removed: 11;
Total costs of field reviews: $15,378,082.
Fiscal Year: 2002;
Number of field reviews: 1,868;
Number of appraisers removed: 97;
Total costs of field reviews: $300,000.
Fiscal Year: 2003;
Number of field reviews: 1,420;
Number of appraisers removed: 132;
Total costs of field reviews: $255,000.
Source: HUD.
[A] HUD 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.
[B] For 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.
[End of table]
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.[Footnote 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:
[See PDF for image]
[End of figure]
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:
* institute reasonable controls on the process of placing appraisers on
the appraiser roster to ensure that applicants' conformance to
eligibility criteria is verified;
* 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;
* 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:
* 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
[Hyperlink, 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
[Hyperlink, woodd@gao.gov], or Paul Schmidt, Assistant Director, at
(312) 220-7681 or [Hyperlink, schmidtpj@gao.gov]. Major contributors to
this report are listed in appendix III.
Signed by:
David G. Wood:
Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
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.
[End of section]
Appendix II: Comments from the Department of Housing and Urban
Development:
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT:
WASHINGTON, DC 20410-8000:
ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER:
Mr. David G. Wood:
Director:
Financial Markets:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
OCT 21 2004:
Dear Mr. Wood:
Thank you for permitting the Federal Housing Administration (FHA) to
address the Draft Report, "HUD's Risk-Based Oversight of Appraisers
Could Be Enhanced." While the report acknowledges that FHA implemented
policy and procedural changes since GAO's last audit, performed in
1999, it does not recognize the significance of these changes. If GAO
compared FHA's new methodology for identifying poorly performing
appraisers with the procedures evaluated in the 1999 audit, the results
are startling: FHA reduced annual operating costs by 98%; increased the
efficiency of appraiser field reviews by 97.5%; and identified and
removed nearly six times as many poorly performing appraisers each
year.
FHA believes it is not only appropriate, but also necessary for the
report to clearly present and highlight these significant achievements.
From fiscal year 1998 through fiscal year 2001, FHA expended nearly $17
million each year to remove on average 20 appraisers per year. In
contrast, for fiscal years 2002 and 2003, FHA has spent less than
$300,000 each year to remove on average of 115 appraisers per year. FHA
has reduced the cost to the government by $16.7 million per year, a
reduction of 98%. The cost per appraiser removed has been reduced from
$850,000 to $2,600, a reduction of over 99%.
Under the old methodology, nearly 60,000 field reviews were performed
each year, to achieve the relatively low level of 20 removals, on
average. The current procedures require only 1,600 field reviews to
achieve on average 115 removals. Previously, HUD conducted almost 3,000
field reviews per appraiser removed. Now, with risk-based targeting,
HUD conducts fewer than 15 reviews to achieve a removal.
These extraordinary cost reductions and productivity improvements have
occurred because HUD has completely revamped its appraiser review
methodology. FHA now targets appraisers for review based on the risk
they pose to the Mutual Mortgage Insurance (MMI) fund.
It should also be noted that while FHA instituted this more rigorous,
risk-based appraiser oversight methodology, the agency has
simultaneously improved FHA's reputation as a business partner. FHA's
program changes have captured the attention of the industry. While FHA
sanctions less than 1% of program participants, the appraisal and
lending industries are alert to their role in assuring the quality of
FHA appraisals. Both the Appraisal Institute and the Mortgage Bankers
Association have applauded FHA's efforts to remove poorly performing
appraisers without adversely affecting the administration of the FHA
Single Family mortgage programs.
FHA's response to the GAO report is organized into three sections: 1)
Program Accomplishments; 2) Response to GAO Findings/Factual Errors;
and 3) Response to Recommendations for Executive Action. While some
information presented may be redundant, FHA feels that it is important
to cover each of these objectives separately to ensure that the
response is comprehensive and clear.
Section 1: Program Accomplishments:
A) Decrease in Program Operating Costs:
The table below reflects the significant decrease in costs between the
old methodology for identifying poorly prepared appraisals and the new
methodology for identifying poorly performing appraisers. This change
resulted in a 98% decrease in operating costs.
Fiscal Years: Old Methodology: FYs 1998-2001;
Average Costs of Field Reviews: $16,984,937.
Fiscal Years: New Methodology: FYs 2002-2003;
Average Costs of Field Reviews: $277,500.
[End of table]
B) Increase in Effectiveness at Identifying Appraisers that do not meet
FHA Requirements:
The table below reflects the significant increase in FHA's
effectiveness between the old methodology for identifying poorly
prepared appraisals and the new methodology for identifying poorly
performing appraisers. The change resulted in a 475% increase in HUD's
identification and removal of poorly performing appraisers.
Fiscal Years: Old Methodology: FYs 1998-2001;
Average Number of Removals: 20.
Fiscal Years: New Methodology: FYs 2002-2003;
Average Number of Removals: 115.
C) Increase in Efficiency at Performing Field Reviews:
The table below reflects the significant increase in FHA's efficiency
between the old methodology for identifying poorly prepared appraisals
and the new methodology for identifying poorly performing appraisers.
The change resulted in a 97.5% decrease in the number of field reviews
necessary to identify far more poorly performing appraisers.
Fiscal Years: Old Methodology: FYs 1998-2001;
Average Number of Field Reviews: 59,690.
Fiscal Years: New Methodology: FYs 2002-2003;
Average Number of Field Reviews: 1,644.
[End of table]
D) Risk Based Monitoring and Targeting of Appraisers:
In FY2002, FHA adopted a new risk-based approach for monitoring
appraisers, which resulted in the dramatic decrease in costs and
increase in appraiser removals outlined above.
Appraiser Watch targets appraisers for review based upon traditional
risk factors. Appraisers are identified by their association with loans
that are experiencing early defaults, loans experiencing early defaults
that are insured under FHA's higher-risk programs, and loans that are
performing worse than loans associated with their appraiser peers.
Based on these criteria, HOC staff generates a list of potentially
high-risk appraisers and targets for review a minimum of 30 appraisers
per quarter. The scope of this effort is comprehensive. Program staff
analyzes the performance of all 27,000 appraisers on the FHA Roster
each quarter to determine which appraisers present the greatest risk to
FHA.
E) Testing of Appraisers:
FHA worked in cooperation with the mortgage and appraisal industries to
develop the FHA appraiser examination. This examination tests the
competency of the individual appraisers, regarding both general
appraisal requirements and FHA requirements. All licensed appraisers
are required to pass the test to participate in FHA Single Family
mortgage insurance programs. This test became mandatory February 1,
2000 and was updated October 1, 2004 to reflect * current program
changes. A reputable national testing company administers the test for
FHA.
F) Final Rules:
In response to GAO's last audit report, performed in 1999, FHA has
promulgated four rules to strengthen its oversight and control of
appraisers as well as improve appraisal qualify. These rules expand
FHA's authority to remove poorly performing appraisers; prohibit the
"flipping" of properties; enhance FHA's appraiser qualifications
requirements; and reinforce lenders' accountability for the quality of
appraisals. These rules are listed below:
* Final Rule/FR-4572-D-19 (effective July 19, 2001), Redele atg ion of
Authority To Remove Appraisers From FHA Roster provides notice of re-
delegation of authority to remove appraisers from the FHA Roster
pursuant to the HUD regulation at 24 CFR § 200.204. The Federal Housing
Commissioner re-delegated to certain HUD officials in all four FHA
Single Family Homeownership Centers (HOCs) the power and authority to
issue notices of removal from the FHA Appraiser Roster to appraisers
who have been found in violation of HUD's appraisal regulations.
* Final Rule FR-4615-F-02 (Effective June 2, 2003), Prohibition of
Property Flipping in HUD's Single Family Mortgage Insurance Pros
enacted 24 CFR § 203.37a and amended 203.255, and addresses property
"flipping," the practice whereby a property recently acquired is resold
for a considerable profit with an artificially inflated value, often
abetted by a lender's collusion with the appraiser. Specifically, the
final rule establishes certain new requirements regarding the
eligibility of properties to be financed with FHA mortgage insurance.
The new requirements prohibit flipped properties from FHA-insured
mortgage financing, thus precluding FHA home purchasers from becoming
victims of predatory flipping activity.
* Final Rule FR-4620-F-02 (Effective June 16, 2003), Appraiser
Qualifications for Placement on FHA Single Family Appraiser Roster
amended 24 CFR § 200.202 & 200.204 and makes several changes that
strengthen the licensing and certification requirements for placement
on the FHA Appraiser Roster. Appraisers on the FHA Appraiser Roster
must have credentials that are based on the minimum licensing/
certification standards issued by the Appraiser Qualifications Board of
the Appraisal Foundation. The final rule also provides that an
appraiser whose license or certification in any state has been revoked,
suspended, or surrendered as a result of a state disciplinary action
will be automatically suspended from the roster until HUD receives
evidence that the state imposed sanction has been lifted.
* Final Rule R-4722-F-02 {Effective August 19, 2004), FHA Single Family
Mortgage Insurance Lender Accountability for Appraisals amended 24 CFR
§ 25 & 203 and clarifies that lenders are accountable for the quality
of appraisals on properties securing FHA-insured mortgages.
Specifically, lenders that submit appraisals to HUD that do not meet
FHA requirements are subject to the imposition of sanctions by the HUD
Mortgagee Review Board. The codification of these policies provides HUD
additional enforcement authority, reminds lenders of their
responsibilities with respect to appraisals, and ensures that
homebuyers receive an accurate statement of the appraised value of
their homes.
G) Mortgagee Letters:
Since GAO's last report, FHA has issued 9 Mortgagee Letters to the
27,000 FHA Appraisers and 10,000 FHA-Approved Mortgagees to strengthen
FHA's oversight and control of appraisers and appraisal quality. These
Mortgagee Letters are listed below:
* Mortgagee Letter 99-18, published June 28, 1999, as part of a process
to increase the accuracy and thoroughness of FHA appraisals performed
as part of the home-buying process, announced the issuance of Handbook
4150.2, the Comprehensive Valuation Package (CVP), and the updated
"Importance of Home Inspections" form. Five attachments to the
mortgagee letter were as follows: 1) Handbook 4150.2, 2) Uniform
Residential Appraisal Report, 3) Part 2 of the CVP, Notice to Lender,
4) Part 3 of the CVP, Notice to the Homebuyer and 5) Four Your
Protection: Get a Home Inspection.
* Mortgagee Letter 99-29, published September 10, 1999, provided
clarification that the VC form does not constitute a home inspection
and that appraisers are competent and adequately trained to properly
fill out the VC sheet.
* Mortgagee Letter 99-32, published November 12, 1999, provided
guidance and clarification regarding FHA appraisal guidelines and
reporting standards as a result of the issuance of Handbook 4150.2, the
Comprehensive Valuation Plan and the updated "Importance of Home
Inspections". FAQs were included as an exhibit with the mortgagee
letter.
* Mortgagee Letter 99-35, published November 24, 1999, announced new
requirements for placement and retention on the FHA Appraiser Roster,
including successfully passing an examination.
* Mortgagee Letter 00-30, published August 7, 2000, transmitted a
revised (from that contained in HB 4150.2) copy of the FHA appraiser's
performance and sanctions matrix, which outlines the type of sanction
that may be imposed by the type of performance violation.
* Mortgagee Letter 2003-07, published May 22, 2003, provides a synopsis
of the Final Rule FR--02, which amended the mortgage insurance
regulations to prevent the practice of flipping on properties that will
be financed with FHA-insured mortgages. This mortgagee letter, with the
effective date of June 2, 2003, also provides specific guidance to
assist lenders in complying with the new requirements.
* Mortgagee Letter 2003-09, published June 20, 2003, announces the new
appraiser qualifications far placement on the FHA Appraiser Roster,
updating requirements contained in Mortgagee Letter 99-35 and HUD
Handbook 4150.2 CHG1. The Mortgagee Letter provides specific guidance
to assist mortgagees and appraisers in complying with the new
requirements.
* Mortgagee Letter 2003-18, published October 16, 2003, informs
Mortgagees that the Federal Housing Administration (FHA) has updated
Form HUD-92564-VC, "Notice to the Lender" (Valuation Conditions/VC
form) and Form HUD-92564-HS, "Notice to the Homebuyer" (Homebuyer
Summary). Appraisers and Mortgagees are required to use the new forms
for all cases submitted for case number assignments 30 days after the
date of the Mortgagee Letter. In addition, FHA reduced the CHUMS data
entry requirements outlined in Mortgagee Letter 00-06.
* Mortgagee Letter 2004-04, published January 22, 2004 announces the
revision of Fonn HUD-92564-CN (For Your Protection: Get a Home
Inspection) to clarify the importance of and differences between an
appraisal and a home inspection.
H) FHA Handbook:
Since GAO's last report, FHA has completed a comprehensive update of
the Appraisal Handbook, HB 4150.2, CHG-1, "Valuation Analysis for Home
Mortgage Insurance for Single Family One-to Four Unit Dwellings."
Completed in July 1999, this update represents the first significant
modification to this policy guide in 9 years: it incorporated policy
guidance announced in 16 mortgagee letters published between 1990 and
1999, and provides detailed, step-by-step instructions on how to
prepare an FHA appraisal.
I) FHA Appraisal-Related Forms:
Since GAO's last report, FHA has revised or created additional forms to
strengthen the FHA appraisal reporting process.
* Form HUD-92564-HS (Notice to Homebuyer), October 2003:
The appraiser prepares the Homebuyer Summary to document any property
conditions that are not in conformance with HUD's Minimum Property
Standards or Requirements. The form is given to the homebuyer before
loan closing.
* Form HUD-92564-CN (For Your Protection: Get a Home Inspection),
January 2004:
"For Your Protection: Get a Home Inspection," informs the homebuyer
that FHA does not guarantee the value or condition of the property, an
appraisal is not a home inspection, and the borrower has the right to
have the house inspected by a professional home inspector.
* Form HUD-92564-VC (Valuation Condition Sheet), October 2003:
The VC form has been revised to more clearly reflect the items under
each of the current VC categories needed to meet the Department's
Minimum Property Standards or Requirements. The lender must clear these
items before loan closing.
J) Staff Increases:
FHA upgraded and increased staffing levels at Headquarters (HQ) to
ensure better oversight, monitoring and control of real estate
valuation issues with respect to FHA insured properties. Major changes
are listed below:
* Creation of a Valuation Branch in FY 2003 to handle all valuation and
appraisal related issues. Prior to its creation, there was no single
team to address these issues and coordinate consistency in the
application of valuation policy with the Homeownership Centers (HOC).
* Creation of full-time manager of Valuation Branch, appointed in
FY2003. Prior to the creation of this position, there had been no one
specific individual with a real estate valuation background to oversee
and direct appraisal and real estate valuation related issues at the HQ
level.
* Addition of three certified/licensed appraisers, all of whom have
extensive experience in the private sector, to HQ staff in FY 2003.
Prior to the addition of these certified /licensed appraisers, HQ had
no staff member who was either a certified or licensed real estate
appraiser.
* Addition of three staff persons to augment data verification and data
entry tasks associated with the Appraiser Roster Management. As noted
previously, there are approximately 27,000 appraisers on the FHA
Appraiser Roster and the addition of this staff enabled HQ to ensure
the timely processing of new applications for the Roster as well as
provide thorough and accurate monitoring of appraisal state license/
certification renewal.
K) Staff Training:
FHA has provided training to its staff to ensure that personnel are
adequately up to date on changes in the industry that affect appraisal
policy. This training is offered to the certified/licensed appraisers
and other staff. The staff training is listed below:
* Appraisal Principles, Appraisal Institute Course 110, provided an
overview of the valuation process, emphasizing basic appraisal concepts
and procedures.
* Appraisal Procedures, Appraisal Institute Course 120, provided
problem solving using the three approaches to value (Cost, Sales
Comparison and Income Approaches to Value) as well as appraisal report
preparation techniques.
* Standards of Professional Practice, Part A of the Uniform Standards
of Professional Practice (USPAP), Appraisal Institute Course 410,
provided an overview of basic rules for ethical behavior and competent
performance for appraisers and is designed to comply with USPAP
requirements for state certified appraisers.
* Appraising Manufactured Housing, Appraisal Institute Seminar,
provided a primer on how to identify and analyze various types of
manufactured housing as well as an in-depth overview of manufactured
housing requirements under HUD's Title 11 program.
* The National Automobile Dealers Association (NADA) provided appraisal
training with respect to the development and use of the NADA
Manufactured Housing Appraisal Guide and manufactured housing valuation
requirements under HUD's Title I program.
L) Training for Lenders and Appraisers:
Changes and updates in the real estate industry are inevitable. As
changes to FHA programs occur or when clarification on existing polices
and practices are needed, FHA provides timely notification and
comprehensive training to appraisers and lenders. In addition, guidance
is provided on where and how to obtain information on FHA programs. The
types of recent training are outlined below:
* National Lender Training: National training includes a segment on the
FHA appraisal process, which highlights updates and changes to the
requirements on how to appraise existing, proposed and new construction
of one-to four-unit single family homes. The session, which includes a
short question and answer forum for attendees, was presented in 4
locations during FY 2004. (Orlando, FL; Philadelphia, PA; Denver, CO
and Atlanta, GA). Another national training session is scheduled for
Santa Ana, CA in November 2004.
* Localized Training: Each fiscal year, the HOCs conduct a minimum of
200 training sessions for lenders and appraisers. The topics are quite
similar to the national lender training, but provide more details and
focus on topics unique to the area in which the training is conducted,
such as common appraisal deficiencies indicative of a particular
housing area. For example, the Atlanta HOC provides more guidance on
manufactured housing, since it has the highest volume of loans
involving manufactured homes.
M) Management Oversight and Control:
FHA Headquarters and HOC managers and staff maintain continuous contact
internally and externally with the lending and appraiser industries to
ensure sufficient management oversight and control.
* Biweekly Conference Calls between Headquarters and HOCs to discuss
appraisal oversight issues;
Monthly meetings with the Appraisal Subcommittee (ASC), attended by
both a Headquarters manager and licensed appraisers on staff (ASC is a
federal entity created under the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 to develop appraisal-related
policies and monitor implementation of appraisal standards by private,
state, and federal parties);
* Quarterly meetings of the Appraisal Foundation Advisory Council
(TAFAC), where Headquarters manager represents HUD as a voting member
of the council;
Coordination with systems contractor (ATS) to constantly improve
appraiser and appraisal data captured in CHUMS as well as
implementation of the interface of CHUMS with National Registry of the
Appraisal Subcommittee (ASC):
Section 2: Response to GAO Findings/Factual Errors:
FHA is concerned that the report contains several significant factual
errors. A list of these errors, along with the appropriate correction
is provided below:
* Page 1, Paragraph 1, second from last sentence, and repeated on page
23: "However, HUD does not document all verifications of appraisers'
eligibility for the roster and has limited quality control over the
approval process."
This statement is not accurate. FHA has a paper record for each
application processed. A staff program analyst creates each of these
records. The records are maintained in Headquarters and were available
for review and inspection by the GAO auditors. However, the GAO
auditors did not review these records. The program analyst's
verification and documentation procedures include:
1. Manually notating a new applicant's file evidencing that he or she
has been screened against HUD's Limited Denial of Participation List;
General Services Administration's Excluded Parties List System; and the
Credit Alert Interactive Voice Response System which indicates
delinquency on federal debt;
2. Verifying compliance with ASC National Registry/"AQB" Field, from
the revised CHUMS Appraiser File (CHUMS file revised June 2004 when
regulations for this requirement became effective);
3. Manually notating the new applicant's file regarding eligibility and
verification from ASC National Registry:
4. Confirming the Prometric Certificate indicating FHA Appraiser test
was completed with passing grade;
5. Initialing and dating new applications with the date the FHA
Appraiser was placed on the Roster, certifying completeness of the
verification eligibility criteria; and:
6. Placing all source materials (documenting various eligibility checks)
in an application file. All such files are stored in a locked cabinet
in Headquarters.
* Page 1, Paragraph 2, second from last sentence and reiterated on pages
3 and 15: "However they (HUD) reviewed fewer appraisals for each
targeted appraiser than HUD's guidance prescribes: on average, about
5.6 appraisals, instead of the 10 called for."
This statement is not accurate. The figures refer to the number of desk
reviews conducted. In fact, HUD's guidance, issued April 23, 2002,
recognizes that 10 appraisals may not be available for review. The
guidance states: "Desk review 10 cases per appraiser (if possible as
there may not be 10 cases) and field review no more than 5"(emphasis
added). Under many circumstances, 10 cases are not available for desk
review. Also, during the course of the desk reviews, the analyst may
determine from fewer than 10 cases that field reviews are warranted.
Rather than expending government resources to perform additional desk
reviews, HUD immediately proceeds to field review the cases identified.
* Page 13, Paragraph 2, and page 23 of the report states that GAO could
not verify whether the appraisers identified for review met HUD's
criteria, nor that they represented greatest risk to FHA.
FHA generates its targeting lists from the Neighborhood Watch system
and can regenerate these lists by inputting the same criteria used to
create the original reports. Neighborhood Watch is a transactional
system and its data changes on a daily basis, so the system may not
reproduce exactly the same lists as were reported at a previous time.
The variation from month to month is slight, however, because
appraisers identified as poorly performing in one month remain on the
list for succeeding months.
However, as will be discussed in the recommendations section, FHA will
modify the Neighborhood Watch system to archive quarterly reports in
order to maintain the historical targeting records.
* Page 14, Paragraph 1, last two lines read "More importantly, in the
absence of this information, HUD ... may be unable to determine the
effectiveness of its targeting criteria in reducing risk to the
mortgage insurance fund."
This statement is not accurate. HUD's Appraiser Watch system directly
targets the appraisers that present the greatest risk to the MMI Rind.
Page 14, last sentence states "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."
As noted by GAO, all four HOCs have completed more than the required
minimum number of 30 field reviews per quarter. In fact, each HOC
reviews every appraiser identified by Appraiser Watch whose volume
exceeds a minimum threshold and whose claim and default rates exceed
their peers' rates by 200%. HOC managers then use their discretion to
supplement this core list, identifying additional appraisers for
review. FHA generates the Appraiser Watch targeting lists at the
beginning of each fiscal quarter and completes the reviews of these
targeted appraisers during that same quarter. However, the supplemental
field reviews, which may be conducted as a result of consumer
complaints or for other reasons, may be initiated at any point in a
quarter and completed during another quarter. While contracting
resources are limited, FHA has provided the funds necessary to perform
all field reviews.
* Page 16, subhead states "HUD Conducted Limited Oversight of Field
Review Contractors."
This statement is not accurate. FHA conducts a 100 percent review of
the contractor's work. Initially, a program analyst performs a complete
analysis, comparing the appraisal field review report with the original
appraisal. Each field review appraisal is also verified using available
data, such as public records, the Multiple Listing Service (MLS), and
Automated Valuation Models (AVM), when applicable. A second review is
conducted by HOC senior management for any action that is considered
"sanctionable," based on any discrepancy between appraisal prepared for
the original mortgage and the contractor's field review report.
Finally, the original appraiser is allowed to dispute any findings and
to submit evidence to counter any findings of the field review report.
* Page 17, 2nd paragraph 40' line reads: "HUD officials explained that
they are constrained by limited travel resources and so are not able to
make on-site property visits."
The issue is not that travel resources are limited. The HOCs do not
conduct on-site reviews because the 100% review method described above
serves as an appropriate and effective risk-control measure.
* Page 23, Paragraph 1, 2nd to the last sentence reads "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."
This concluding statement is based on the inaccurate information cited
above. The main finding, that FHA does not verify and document the
verification that all appraisers meet HUD's qualifications is not
correct. The targeting methodology employed by FHA has proven to be
vastly superior to the previous methodology at reducing risks to FHA.
As stated throughout this response, FHA's new methodology is less
costly, more effective, and more efficient. The issues noted by GAO and
the attendant proposed recommendations do not and will not affect FHA's
risk.
Section 3: Response to Recommendations for Executive Action:
GAO Recommendation: Institute reasonable controls on the process of
placing appraisers on the appraiser roster, including documenting that
verifications of applicant eligibility for the roster are conducted.
FHA Response: As described above, FHA has a thorough application review
process whereby each applicant's eligibility is verified and each of
these verifications is documented. This process has been in place since
January 2003. FHA staff creates a paper record for each application
processed and these records include documentation that all eligibility
criteria are verified for every applicant. All of these records are
maintained in Headquarters and were available for review and inspection
by the GAO auditors.
As described above, the program analyst verifies each applicant's
compliance with the FHA eligibility criteria. Each file contains source
material to document that each of these checks has been completed and
each file is manually notated, whereby the analyst initials that each
verification has been completed. In addition, each file contains the
date when the FHA Appraiser was placed on the Roster.
GAO Recommendation: 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.
FHA Response: FHA will consider this recommendation. To implement such
a change, FHA would need to evaluate, first, how to incorporate a non-
risk-based approach into the current risk-based methodology; and
second, whether the change would have any impact on the effectiveness
of FHA's current risk-based approach. FHA would want to ensure that the
interjection of a manual process (which is not readily automated) would
not divert resources from the current automated targeting of appraisers
based on predetermined risk factors, which has proven to be successful.
GAO Recommendation: 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.
FHA Response: As noted above, the targeted appraiser lists change only
slightly from month to month. However, FHA will modify the Neighborhood
Watch system to archive quarterly reports to maintain this historical
targeting records.
GAO Recommendation. Implement a cost-effective field review contractor
oversight process that includes on-site monitoring.
FHA Response: FHA currently has a cost-effective contract oversight
process. FHA performs a 100 percent review of the contractors' work. As
described above, the four Homeownership Centers follow a comprehensive
quality control process that requires FHA staff and managers to review,
verify, and ensure there are no discrepancies between the original
appraisal, reports submitted by contractors, and relevant property
documentation. The review covers all aspects of the property valuation
process, including an evaluation of the computations of value,
photographs, maps, public records, and MLS listings, to quickly
identify any potential problems. FHA therefore doubts that on-site
monitoring is necessary, but will consider this recommendation.
Sincerely,
Signed by:
John C. Weicher:
Assistant Secretary for Housing-Federal Housing Commissioner:
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
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.
(250196):
FOOTNOTES
[1] FHA is a part of HUD, and the Assistant Secretary for Housing is
also the Federal Housing Commissioner.
[2] GAO, Single-Family Housing: Weaknesses in HUD's Oversight of the
FHA Appraisal Process, GAO/RCED-99-72 (Washington, D.C.: Apr. 16,
1999).
[3] GAO, Major Management Challenges and Program Risks: Department of
Housing and Urban Development, GAO-03-103 (Washington, D.C.: January
2003).
[4] U.S. Department of Housing and Urban Development, Office of
Inspector General, Semiannual Report to Congress, October 1, 2003
through March 31, 2004 (Washington, D.C.: Mar. 31, 2004).
[5] The Appraiser Qualifications Board promulgates and maintains the
Appraiser Qualifications Criteria, which all appraisers must meet in
order to be certified by state appraiser regulatory agencies.
[6] Estimating the value of the property for mortgage insurance
purposes protects the lender from loaning more than the home is worth
and minimizes the losses to HUD if the property has to be sold due to
foreclosure.
[7] 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. All state-certified appraisers must meet the Appraisal
Qualifications Criteria, as imposed by the state appraiser regulatory
agencies. The minimum licensing criteria, which are imposed by each
state's regulatory board, require that appraisers have 90 hours of
classroom training in subjects relating to real estate appraisals, have
2,000 hours of appraisal experience, and pass its endorsed examination
or an equivalent examination.
[8] The Suspension and Debarment List is a governmentwide compilation
of individuals and firms ineligible to participate in federal programs.
The Limited Denial of Participation List includes all individuals who
have been issued a limited denial of participation, which is an action
that excludes a party from further participation in a HUD program area
for generally one year. The Credit Alert Voice Interactive Response
System is a database of delinquent federal debtors that allows federal
agencies to reduce the risk to federal loan and loan guarantee
programs.
[9] See 68 Fed. Reg. 95 FR 26946 (May 16, 2003) Appraiser
Qualifications for Placement on FHA Single Family Appraiser Roster;
Final Rule.
[10] The Appraisal Subcommittee was created as a federal entity and was
charged with monitoring the implementation of Title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989. Title XI
provides for national uniformity in appraisal standards and minimal
national qualification requirements for appraisers. The Appraisal
Subcommittee's mission is to ensure that real estate appraisers who
perform appraisals in real estate transactions that could expose the
United States government to financial loss are sufficiently trained and
tested to assure competency and independent judgment according to
uniform high professional standards and ethics.
[11] The section 203(k) program is the department's primary program for
the rehabilitation and repair of single-family properties.
[12] The number of appraisers reviewed refers to the number of
appraisers that were desk or field reviewed, unless specified
otherwise.
[13] 65 Fed. Reg. 49004 (Aug. 10, 2000); see 24 CFR part 200.204.
[14] Of the 2,055 appraisers who were desk or field reviewed during
fiscal year 2003 and the first half of fiscal year 2004, 1,004 were
field reviewed. Because, according to HOC officials, most sanctions are
based on findings from field reviews, we used the number of field
reviews in our analysis.
[15] A limited denial of participation is an action usually taken by a
HUD field office or the Deputy Assistant Secretary for Single Family
Housing that excludes a party from further participation in a HUD
program area for generally one year.
[16] A notice of deficiency is a letter from the HOCs describing the
deficiency and requires no further action by the appraiser. However,
the notice is maintained by HUD in the appraiser's file.
[17] HUD pursues civil sanctions by initiating an investigation of the
alleged noncompliant action. Any findings and conclusions are submitted
to HUD's Office of the General Counsel or to the Enforcement Center. If
either office determines that the investigation report supports an
action, the office submits a written request to the Department of
Justice for approval to pursue civil sanctions. If the noncompliant
action is so egregious as to violate criminal law, the General Counsel
or Inspector General refers the case to the Department of Justice to
pursue criminal penalties.
[18] The field review questions follow the Uniform Residential
Appraisal Report and the new Valuation Conditions Form, both of which
are used to conduct FHA appraisals.
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