Single-Family Housing:

HUD's Risk-Based Oversight of Appraisers Could Be Enhanced

GAO-05-14: Published: Nov 5, 2004. Publicly Released: Nov 5, 2004.

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Incomplete or inaccurate appraisals resulting in property overvaluations may expose the Department of Housing and Urban Development's (HUD) Single-Family Mortgage Insurance programs--which insured about 3.7million single-family mortgage loans with a total value of about $425 billion in fiscal years 2001 through 2003--to greater financial risks. In 1999, GAO reported on the need for improvements in HUD's oversight of appraisers, which has historically been a challenge for the department. Also, in the past, GAO reported that, due in part to poor oversight of appraisers, HUD's Single-Family Mortgage Insurance programs remained a high-risk area. GAO conducted this review as a follow up to the 1999 report. This report examines (1) how HUD ensures that appraisers it approves are qualified to perform FHA appraisals, (2) the extent to which HUD employs a risk-based monitoring approach, and (3) HUD's efforts to take enforcement action against noncompliant appraisers.

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.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: 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, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to 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.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: HUD updated its procedures for the monitoring and oversight of Federal Housing Administration (FHA) appraiser field review contractors. These procedures, effective in July 2005, were designed to improve upon FHA's risk-based targeting methodology and to respond to our audit recommendations by maintaining needed historical information. In January 2006, HUD issued updated revised procedures for the monitoring and oversight of FHA's field review contractors in order to further respond to our audit recommendations. These new procedures, which took effect in March 2006, provide instructions on record retention. Specifically, each HOC must maintain a record of the greater of five years or two years beyond any court proceeding; data used to target contractors each quarter; listing of contractors targeted and monitored; criteria under which each contractor was identified for monitoring and oversight; and findings from review of contractors and any actions taken. Maintenance of this historical information can help HUD to (1) ensure that the appropriate appraisers are being systematically targeted and reviewed based on its criteria and (2) determine the effectiveness of its targeting criteria in reducing risk to the mortgage insurance fund.

    Recommendation: 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, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to 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.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: HUD had been working with its systems contractor to reprogram a system to flag these appraisers for re-review and hoped that the change would be implemented by June 2005. However, HUD determined that in a given reporting period, the number of cases attributable to appraisers who recently completed a sanction period is so small as to make it difficult to justify expenditure on a system enhancement. Therefore, beginning in January 2005, HUD's system has been manually generating up to five case numbers on a quarterly basis that each of these appraisers has processed since being returned from sanction. HUD believes that this manual procedure implements the recommendation on a cost-effective basis since the procedure is simple, straightforward, and easily sustainable.

    Recommendation: 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, the Secretary of HUD should 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.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: In November 2004 HUD developed and implemented a quality control plan for FHA appraiser roster eligibility verification to verify that compliance checks are conducted appropriately and that each file contains accurate information. This plan was implemented to improve the documentation verification process and to ensure that quality control reviews are performed on a regular and timely basis.

    Recommendation: 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, the Secretary of HUD should direct the Assistant Secretary for Housing-Federal Housing Commissioner to implement a cost-effective field review contractor oversight process that includes on-site monitoring.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: HUD updated its procedures for the monitoring and oversight of Federal Housing Administration (FHA) appraiser field review contractors. These procedures, effective in July 2005, were designed to improve upon FHA's risk-based targeting methodology and to respond to our audit recommendations. In January 2006, HUD issued updated revised procedures for the monitoring and oversight of FHA's field review contractors to further respond to our audit recommendations. These new procedures, which took effect in March 2006, instruct HUD staff to select two appraisal field review cases performed by a contractor to evaluate the contractor's performance, and conduct on-site field reviews, physically visiting the subject property and each of the comparable sales used to appraise the subject property. 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 to help reduce risk to the mortgage insurance fund.

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