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HUD Invites Public Comment

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Francois K. Gregoire

Senior Member
Jan 14, 2002
Professional Status
Certified Residential Appraiser
Hi All,

Posted verbatim - Biting my tongue.

[Federal Register: July 23, 2002 (Volume 67, Number 141)]
[Proposed Rules]
[Page 48343-48345]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[[Page 48343]]
Part V

Department of Housing and Urban Development
24 CFR Part 200
FHA Appraiser Watch Initiative; Advance Notice of Proposed Rulemaking;
Proposed Rule

[[Page 48344]]

24 CFR Part 200

[Docket No. FR-4744-A-01]
RIN 2502-AH81

FHA Appraiser Watch Initiative; Advance Notice of Proposed

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Administration, HUD.

ACTION: Advance Notice of proposed rulemaking.
SUMMARY: This document requests comments on issues related to the
implementation of the Federal Housing Administration (FHA) Appraiser
Watch Initiative. Through the Appraiser Watch Initiative, HUD plans to
establish and monitor a performance standard that appraisers must meet
to maintain their status on the FHA Appraiser Roster (Roster). HUD is
considering an approach modeled on FHA's Credit Watch Termination
Initiative that would provide for an electronic, fully computerized
Appraiser Watch monitoring system, and would permit an appraiser to be
removed from the Roster if the rate of defaults and claims on closed
mortgages linked to the appraiser exceeds a rate established by HUD.

DATES: Comment Due Date: September 23, 2002.

ADDRESSES: Interested persons are invited to submit comments regarding
this advance notice of proposed rulemaking to the Regulations Division,
Office of General Counsel, Room 10276, Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC 20410-0500.
Communications should refer to the above docket number and title.
Facsimile (FAX) comments are not acceptable. A copy of each
communication submitted will be available for public inspection and
copying between 7:30 a.m. and 5:30 p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Vance Morris, Director, Office of
Single Family Program Development, Room 9266, Department of Housing and
Urban Development, 451 Seventh Street, SW., Washington, DC 20410-8000;
telephone (202) 708-2121 (this is not a toll-free number). Persons with
hearing or speech impairments may access this number via TTY by calling
the toll-free Federal Information Relay Service at 1-800-877-8339.


A. Critical Role of Appraisers in FHA-Insured Home Loans

An appraisal is required for every property purchased with an FHA-
insured mortgage. The purpose of an FHA appraisal is to determine the
property's eligibility for mortgage insurance on the basis of its
condition and location, and to estimate the value of the property for
mortgage insurance purposes. As stated in a recent Congressional
report, ``With the high loan-to-value ratio of most FHA loans, an
accurate appraisal is critical to minimizing HUD's insurance risk.''
(Minority Staff of the Permanent Subcommittee on Investigations of the
Senate Comm. on Governmental Affairs, 107th Cong., 1st Sess., Property
``Flipping'': HUD's Failure to Curb Mortgage Fraud 56 (Committee Print
2001)). In recognition of the importance of an accurate appraisal,
section 202(e)(1) of the National Housing Act requires FHA appraisals
to be performed by ``individuals who have demonstrated competence and
whose professional conduct is subject to effective supervision.'' The
purpose of this notice is to request comments on establishing a system
that will enable FHA to remove poorly performing appraisers from the
Roster on the basis of high default and claim rates on loans secured by
the properties appraised by such appraisers. As discussed in greater
detail in section E, of this notice, HUD is specifically requesting
comments on a broad range of issues being considered before a proposed
rule is issued. This oversight of appraisal performance will help
address the concerns that have been raised about this critical segment
of the FHA single family mortgage insurance programs.

B. The FHA Credit Watch Termination Initiative As a Model Approach for

The Appraiser Watch Initiative would implement one of several new
initiatives to protect FHA. Specifically, HUD proposes to establish an
``Appraiser Watch'' system, similar to the successful Credit Watch
system for FHA lenders. The benefit of following an established system
is that it provides for the application of a clear, familiar and
consistent approach to these closely related segments of the FHA
insurance process. Such an approach would prompt these segments to work
more closely and cooperatively to fulfill responsibilities held in
common, attain common goals, and avoid common pitfalls.
Approval of a mortgagee by HUD/FHA to participate in FHA mortgage
insurance programs includes an Origination Approval Agreement (the
Agreement) between HUD and the mortgagee. Under the Agreement, the
mortgagee is authorized to originate single family mortgage loans and
submit them to FHA for insurance endorsement. Some mortgagees, however,
have demonstrated high default and claim rates on their FHA-insured
portfolios that, although not signifying violations of FHA
requirements, are nonetheless unacceptable. As a result, HUD developed
the Credit Watch Termination Initiative to identify mortgagees with
unsatisfactory performance levels and take ameliorative action at an
early stage.
Under the FHA Credit Watch Termination Initiative, FHA
systematically reviews mortgagees' early default and claim rates, that
is, defaults and claims on mortgagees' loans during the initial 24
months following endorsement. In cases of severe performance
deficiencies, HUD may terminate mortgagees' loan origination approval
authority. The Termination of a mortgagee's Agreement is separate and
apart from any action under 24 CFR part 25 taken by HUD's Mortgagee
Review Board against mortgagees for violations of FHA requirements.

C. HUD's FHA Appraiser Roster

HUD has taken various steps to ensure the integrity of FHA
appraisals. On June 1, 1998, HUD launched reforms of the FHA appraisal
process through its Homebuyer Protection Plan. The purpose of these
reforms is to ensure that a lender and FHA receive accurate and
complete appraisals of homes. In keeping with these reforms, HUD has
established regulatory placement and removal procedures for the Roster.
These procedures are codified in subpart G of HUD's regulations at 24
CFR part 200.
HUD's Appraiser Roster lists those appraisers who are eligible to
perform FHA single family appraisals. HUD established the Roster to
provide a means by which HUD can monitor the quality of appraisers who
perform appraisals on single family homes with FHA single family
mortgage insurance and to ensure that appraisers performing appraisals
meet high competency standards. The Roster is an important part of the
FHA Single Family Mortgage Insurance program because accurate,
competent and professional appraisals are vital to the success of the
program and HUD's ability to protect the FHA Insurance Fund.

[[Page 48345]]

D. Appraiser Watch Initiative

HUD is soliciting comments on using a performance-based Appraiser
Watch Initiative similar to the successful Credit Watch system
described above for FHA lenders. The Appraiser Watch system would rate
appraisers on the performance of loans secured by properties they
appraised. Appraisers who are associated with excessive default and
claim rates are subject to notification of proposed removal from the
Roster within 60 days. Just as a consistently higher level of poor
underwriting is reasonably expected to be linked to a consistently
higher level of defaults, a consistently higher level of poor
appraisals may be associated with a consistently higher level of
defaults, regardless of the quality of the underwriting. This is
because the appraisal is a key component of the underwriting process,
and when this key component is inadequate, the rest of the process is
adversely affected from the onset, increasing the probability of
default and claims. While poor underwriting practices also increase the
probability of defaults and claims, it is reasonable to conclude that
at some point, a high enough rate of defaults and claims on loans
secured by properties appraised by an appraiser is indicative of
inadequate performance.
Under a rule similar to Credit Watch, an appraiser may be subject
to removal from the Roster if the rate of defaults and claims on closed
mortgages secured by properties with appraisals performed by the
appraiser exceeds the normal rate in the area of a HUD field office by
a specified amount, and exceeds the national default and claim rate for
closed mortgages. In the case of Credit Watch, lenders are subject to
removal if the rate exceeds 200 percent of the normal rate in the field
office area. Such an objective, performance-based standard allows for
the most efficient use of HUD's limited resources to conduct across-
the-board monitoring of appraisers.
Upon receiving notification of proposed removal under Appraiser
Watch, an appraiser may request an informal conference to present HUD
with relevant reasons and factors, including factors beyond the
appraiser's control, that may have contributed to the excessive default
and claim rates. HUD may withdraw the removal notice based upon the
informal conference.
Consistent with the goals of the Administration regarding the
increased use of technology in government, the Appraiser Watch system
being considered would allow for electronic monitoring. HUD's
electronic Neighborhood Watch system, available via the FHA Connection,
would be used for this purpose. Specifically, HUD would, on an ongoing
basis, review the FHA mortgage default and claim rate on loans secured
by properties appraised by an appraiser in the geographic region served
by a HUD field office and according to the type of appraisal conducted
(i.e., single family, or 2- to 4-unit, or rehabilitation). An
appraiser's performance would be determined relative to the performance
of other appraisers in the same geographic area conducting the same
type of appraisal over the same period of time. HUD would make this
information available to appraisers and the public on an ongoing basis
through the Neighborhood Watch system.
To keep the public informed of the status of appraisers, HUD
believes it is appropriate for any system that is adopted to provide
for publication of the names of appraisers removed from the Roster
pursuant to Appraisal Watch. Further, to prevent delays and disruptions
in any transactions already in progress, HUD believes the appraiser
should be permitted to complete any appraisal already contracted for,
but not be permitted to take on any additional appraisals as of the
date of removal from the Roster. Appraisers should also be permitted to
apply for reinstatement. Appraiser watch is proposed to be a procedure
separate and apart from the Appraiser Roster Placement and Removal
procedures contained in 24 CFR part 200 subpart G. Any rule promulgated
as a result of this ANPR would clearly provide that Appraiser Watch
removal is in addition to and independent from any other remedies and
actions available to HUD under applicable law.

E. Additional Considerations and Request for Comments

HUD seeks to establish a clear, consistent and familiar standard
and procedure for an appraiser to maintain status on, or be removed
from, the Roster. Because it is HUD's goal to promulgate a rule that
will promote, in a fair, reasonable, and efficient manner, the highest
standard of conduct and professionalism among FHA Appraisers, thereby
minimizing the risk of loss to the FHA, HUD is requesting public
comment on all aspects of promoting and maintaining the excellence and
integrity of appraisers listed on the Roster. In particular, HUD
requests comments on the following issues:
1. Whether HUD should establish a minimum number of appraisals as a
threshold for any action, and if so, what number would be appropriate.
2. Whether HUD should specify the age of loans secured by appraised
properties that would be considered under a standard, and what loan age
would be appropriate (e.g., appraisals for loans not more than one, two
or three years old, measured from the time of origination).
3. Whether a higher or lower rate than the 200 percent used in
Credit Watch would provide an adequate measure of appraiser performance
and level of protection for FHA.
4. What period of time over which appraisals are conducted should
be used for evaluation purposes (e.g., performance over 12 months, or
18 months, or 24 months)?
5. What factors in addition to the rate of loan defaults and FHA
insurance claims should HUD consider in evaluating appraiser
6. Should the severity of loss be considered as a factor in
evaluating an appraiser's performance?
7. If included as a factor, how should severity of loss be
considered in evaluating performance?
8. What kinds of factors should be considered as mitigating for an
appraiser with higher than normal default and claim rates (e.g.,
factors beyond the appraiser's control)?
9. How much time should be provided for an appraiser to request an
informal conference after receiving notification of proposed removal
(e.g., 15, 30, or 45 days)?
10. What is an appropriate period of removal from the roster before
a reinstatement is permitted?
11. What are appropriate procedures and factors to consider for

Dated: July 17, 2002.
Sean Cassidy,
General Deputy Assistant Secretary for Housing-Federal Housing
[FR Doc. 02-18672 Filed 7-22-02; 11:25 am]

Wally Jones

Senior Member
Jan 23, 2002
Professional Status
Certified Residential Appraiser
Thank you, Frank. Will work on a response tonight. Hope your tongue gets better soon! (Along with the rest of us.)


Ben Vukicevich SRA

Senior Member
Feb 9, 2002
Professional Status
Certified General Appraiser
New Jersey
Hey Frank

What do you expect from them when they have stuff like this on their website

Your lender will require you to get an appraisal of the house you want to buy, to make sure it's worth the money that you're borrowing. You may select your own appraiser, or you may ask your real estate broker to help you take care of that.

About appraisors and appraisals

Note "appraisor," in the link, that's how they spelled it. Buyers and brokers select appraisers-very good HUD.. Thank goodness they are not under FIRREA and Title XI. And we criticize brokers for having their "pet" appraisers-see they learned it from the HUD website..

Me, I still want to see the default rates for termite inspectors posted by HUD.

And now, I want to see a lender default rate published so I know which one's have prudent underwriters before accepting the FHA assignment..... but I'm dreaming, of course.


Mountain Man

Elite Member
Jan 15, 2002
Professional Status
Certified General Appraiser
:roll: Oh sure, one bad model requires another :evil: . I am going to wait a day or two before writing my response. :twisted: Not feeling very level headed right now.


Senior Member
Jan 15, 2002
Professional Status
General Public
I think, on implimentation of the Appraisal Watch, prices for an FHA appraisal will hit $1200 +. The way I have it figured, the first three years you won't have any work. After that, being the only FHA appraiser on the roster you should be able to get ALL the work regardless of price. Of course, we should join the credit bureau and score applicants for an appraisal prior to accepting the assignment.....along with a commisurate application fee......we wouldn't want to appraise a home for someone who has gone bankrupt, is late on their credit card payments, or has ever been evicted or delinquent on a utility bill.

Mountain Man

Elite Member
Jan 15, 2002
Professional Status
Certified General Appraiser
Very good point Greg. Not only will be they be shooting themselves in the foot, they are going to cut off both legs!

Richard Carlsen

Elite Member
Jan 15, 2002
Professional Status
Licensed Appraiser
I am still trying to figure out how the default of a borrower can translate to the performance of an appraiser.

But the solution is simple: We simply condition the report to require a full review of the borrowers file for credit history, child support, earnings, etc. This is then taken that into account in the value that we assign to the house. If things are not the best with the borrower, the house gets a very low value. It's simple. This way with low values, the deals won't go together and we can’t be charged with defaults. But we still get paid.

Of course after a while, the only ones doing FHA's will be family friends and Brokers pals. That's when Greg's scenario kicks in. Then we raise fees and bingo!…..Fat city.

Julio E. Sune Jr. (FL)

Senior Member
Jan 16, 2002
Professional Status
Certified Residential Appraiser
I agree 100% with Greg Goodpasture. If the new Appraiser Watch is implemented, no appraiser in his right mind would accept an assignment without a full written and supported credit evaluation of the borrower.

Going back in time (Fall -1998)--How many of you remember the original FHA plan for the Home Inspections???--Remember the NAR call to action???--Do you remember the last pages of the FHA plan where the appraiser if found liable/guilty for not reporting a faulty item (say a water heater) would be subject to TRIPLE Damages???
Jan 16, 2002
They have already got my response - effective immediately remove me from your list !

No amount of public comment will ever change a thing. We are dealing with a corrupt and inept federal agency that is completely out of control !
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