Reverse

Appraising: HUD Enhances the Appraisal Process

Written by John Golden, as originally published in The Reverse Review.

September 14, 2015, marked another pivotal day in the appraisal industry. On this date, HUD’s new FHA Single Family Housing Policy Handbook 4000.1 went into effect for all FHA Case Number files issued on and after that date.

This new handbook combines and supersedes more than 400 various single-family handbooks, mortgagee letters and other documents into a single source. If you have ever had the experience of researching single-family housing policy—combing through the multiple resources of handbooks and mortgagee letters just to find answers to a single situation—you understand what a monumental development this is.

The new handbook has been placed in an online resource library powered by the Allregs electronic platform, a well-known publisher of underwriting and loan product guidelines for a number of key organizations in the lending industry, and can easily be accessed through links on the HUD website. This allows for easy access to and through the 4000.1 SFH document libraries, easing previous tensions associated with researching guidelines. The new handbook is broken up into five sections:

  1. Doing Business with FHA
  2. Origination through Post-Closing/Endorsement
  3. Servicing and Loss Mitigation
  4. Claims and Disposition
  5. Quality Control, Oversight and Compliance

The appraisal guidelines are housed in Section II under Subhead B: Appraiser and Property Requirement for Title II Forward and Reverse Mortgages. Within Subhead B, there are 12 categories covering all aspects of the appraisal process, pulling together guidance from numerous handbooks and mortgagee letters.

While monumental, this new handbook did not introduce sweeping changes to the appraisal process for HUD-related reports. Instead, a key focus was highlighted for appraisers to observe, analyze and report: the need for enhanced communication during various stages of the appraisal process.

With the new handbook in effect, mortgagees are required to provide a point of contact so that the appraiser can communicate any noncompliance issues determined in the inspection process. Further, this contact information must be provided to the appraiser before the appraisal process begins. The idea is to bring the appraiser and the DE underwriter together early in the process to work through noncompliance issues so that the appraiser may seek guidance or direction in certain unusual situations.

This is a major benefit for all parties involved as it eliminates the element of surprise for the mortgagee when issues with the property arise. It also helps eliminate the need for requests for correction or additional explanations after an appraisal report has been submitted, which is a plus for the appraiser. As a national appraisal management company, Landmark Network has attempted to foster this kind of communication for some time, especially in unique situations where the appraiser and DE underwriter have difficulty understanding each other’s positions on appraisal matters. As part of these new guidelines, immediate communication is now a mandated part of the process.

The handbook also outlines other changes that will impact the appraisal process. For example, there are 22 specific situations identified within the new 4000.1 SFH handbook in which the appraiser is now required to notify the mortgagee about minimum property requirements or deficiencies regarding:

  1. New construction
  2. Property rights not held in Fee Simple or Leasehold
  3. PUD communities that do not meet HUD’s definition
  4. Leasehold interests that do not comply with HUD’s defined requirements
  5. Non-residential areas exceeding 49 percent for the SFR property
  6. Encroachment effects on the property
  7. Externalities related to special airport hazards for proposed construction, under construction or properties less than 1 year old
  8. Externalities related to properties being located within 10 feet of a pipeline easement boundary
  9. Externalities related to proximity to overhead electric power transmission or distribution lines
  10. Lack of safe pedestrian and adequate vehicular access
  11. Probable or imminent danger of subsidence
  12. Coastal Barrier Resources System or a Lava Zone location
  13. Property improvements that do not comply with HUD’s defined characteristics
  14. Multiple ADUs on a single parcel
  15. Inoperable conveyed appliances
  16. Heating systems that do not comply with HUD’s defined requirements
  17. Inadequate utility systems
  18. Failure of the roof covering, or a roof cover with less than two years of remaining physical life
  19. Inability to view the attic area safely in its entirety (requires rescheduling of the inspection)
  20. Inadequacies related to the basement and/or inoperable applicable sump pump
  21. Inability to view the crawl space safely in its entirety, or crawl space areas that do not meet HUD’s defined requirements
  22. Observed conditions that potentially affect the safety, soundness or security of the dwelling, but are being deferred to inspection by a qualified individual or entity

The new requirements for the mortgagee point of contact ensure the ability for the appraiser to meet their notification obligations for the matters indicated above.

Key reporting changes required for HUD-related appraisal reports now include:

-New requirements for patios/decks indicated on the sketch—must show covered/uncovered

-New photograph requirements for subject street scene, new construction grading, interior rooms, common areas and condominium project amenities

-Inclusion of at least two closed sales within 90 days of the effective date of appraisal, and two active listings or pending sales whenever housing trends are reported to be in motion—increasing or decreasing (formerly only required for decreasing motion)

-Three-year listing history for subject (FHA-specific requirement—industry is 12 months)

-Three-year prior sales/transfer history for all comparables (FHA-specific requirement—industry is 12 months)

Finally, the most noteworthy reporting change is that there is now no requirement for the comparable sales in positions one through three to have settled within the past 12 months of the effective date in the Sales Comparison Approach—though a minimum of three sales that have settled within the past 12 months must be provided. This allows the appraiser the latitude to present what is considered to be truly the best examples of comparison for the subject property in positions one through three, previously a major point of contention for appraisers and mortgagees.

Certainly, these new communication requirements will take some getting used to for both parties. However, such dialogue will provide a platform of mutual respect between appraisers and DE underwriters as they begin to work together. Liability related to the appraisal report has always been shared to a certain degree between these two individuals, though rarely recognized or considered on one side or the other. Communication and collaboration in this regard will help to streamline the appraisal process for the ultimate benefit of the end recipient: the borrower. Kudos to FHA for this major single-family housing effort.

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