Nine months have passed since HUD’s new FHA Single Family Housing Policy Handbook 4000.1 was adopted and there is still confusion among appraisers and mortgagees as it relates to guidelines and who is responsible for meeting them.

It is in our nature to resist change, and the release of the Handbook 4000.1 was perceived by many to include massive changes. As vice president of the National Association of Appraisers (NAA), I was privileged to serve on an ad hoc committee assigned to review a draft of the 4000.1 against previous handbooks and all mortgagee letters, and to make suggestions to HUD based on our review.

From my experience, I can tell you that the new handbook mandates significant change. For starters, HUD relabeled a host of items, changing those once listed as items that “should” be completed or verified to “must.” And they use the word “must” over 4,300 times throughout the new manual; that is up from 2,700 in the 4150.2. This alone caused so much consternation that some appraisal organizations believed that the 4000.1 is at odds with our standards by forcing an appraiser to violate the USPAP’s Competency Rule. Whether this is true or not, one thing is for certain: HUD believed the “should” was always a “must” and without the use of the correct verbiage appraisers were obfuscating their duties and mortgagees were shifting responsibilities.

As a chief appraiser for Landmark Network, I sit in between both parties and find myself on the phone with HUD on a near weekly basis to assist in resolving a misinterpretation or finding a solution that would be acceptable to all. Phone calls suggesting that an appraiser or underwriter should know the new guidelines by now are as common as those that recite a guideline that no longer exists in the 4000.1.

On a positive note, FHA appraisal Continuing Education courses have never been so popular. After September 14, 2015, appraisers either removed themselves from consideration for FHA appraisal assignments or declined them until they were able to attend one of these new classes. I believe appraisers are more aware of their responsibilities when completing an FHA appraisal assignment than ever before. I also understand that there are more than 1,200 pages between the Handbook 4000.1 and the Appraisal Report and Data Delivery Guide, and that committing all of this information to memory is not realistic. This is compounded by the fact that many appraisers simply comply with a request (valid or invalid) from a DE underwriter to avoid conflict, and because one appraiser complies, the mortgagee is led to believe that their request was valid.

Example No. 1:

The mortgagee notes five closed sales, three within 12 months of the effective date of the appraisal and two older than 12 months. The appraiser has placed the sales in the grid in such an order that both of the dated sales over 12 months are in positions one and three. The mortgagee, based on the old Handbook 4150.2, requests that the appraiser move those sales to positions four and five.

This guideline was removed from the 4000.1. Gone! The only requirement is that the appraiser include three sales within 12 months of the effective date of the appraisal. Many believe that restricting an appraiser from reporting an analysis in a way that appears to be the most logical compromises the appraisal process.

Example No. 2:

The mortgagee notes that the subject is on a private sewer system. The appraiser simply comments that 1) public utilities are available and the cost to connect is unknown; 2) private water or sewer systems are typical for the area, included with all comparables and have no impact on the marketability of the subject property; and 3) the well and septic system meets HUD guidelines as it relates to distance requirements. The mortgagee asks one or all of these questions: Can you provide the cost to connect to public utilities and state whether or not it is feasible to connect? Can you certify that the private water system meets the requirements of the health authority with the local jurisdiction or meets the standards set by the EPA for drinking water? Can you include the distances from the well, septic and property lines and include the distances on the sketch?

An appraiser is only responsible for stating if public or community systems are available for hook-up. Most appraisers would not know the cost to connect. It is the mortgagee’s responsibility to determine if connection is feasible and if the cost is reasonable. The mortgagee, not the appraiser, must ensure that the water quality meets certain requirements.

An appraiser is responsible for observing the physical condition of the plumbing system and must operate the system to observe its performance. This means confirmation of water pressure, no foul odors or discoloration, no leaks or structural damages, and the availability of both hot and cold water. It is outside the Scope of Work for an appraiser to certify that the water meets any requirements—and really, are they qualified to do so?

An appraiser must be familiar with the minimum distance requirements between private wells and sources of pollution if noticed. An appraiser is not required to sketch or note the distances and only when comfortable may provide those distances. Once the appraiser states the system meets HUD guidelines, it is presumed that the distance requirements have been met.

Example No. 3:

The mortgagee orders a Single Family Residential appraisal and selects a 1004 URAR. The appraiser identifies that the property as a Site Condo and completes the report on a 1004 URAR as requested. It is not uncommon for appraisers to do this since it has been an accepted practice for years for both conventional and FHA appraisals. If the subject property is a condominium (including a site condominium), Handbook 4000.1 requires the appraiser to complete the assignment on the 1073 Individual Condominium Unit Appraisal Report.

It is important to note that in the initial step of the appraisal process, an appraiser must identify the property/ownership type and the results of those findings determine the form type, regardless of how the mortgagee ordered the appraisal. It is recommended that an appraiser notify the mortgagee of the change and, if questions arise, review the prelim and all related documents to ensure that the report is completed on the appropriate form.

These types of requests and confusion about who “must” address the specified guideline can cause delays. Because there are more classes on the FHA Handbook 4000.1, and because there are more state appraisal organizations educating and supporting their membership on industry-related changes, appraisers are more aware and confident of their position on these matters. And because so many lenders have specific requirements for appraisers that include at a minimum Certified Residential status and inclusion on the FHA Appraiser Roster regardless of the assignment type, it behooves an appraiser to know and comply with the guidelines rather than risk being removed from the FHA Appraiser Roster, which can impact an appraiser’s livelihood.

What are some things that both parties can do to speed up the process?

The mortgagee can provide the following documents, which are required before the appraiser begins the appraisal process.

1. A complete copy of the executed sales contract for the subject, if the loan is a Purchase transaction, with all contract addendums are included. The contract and any addendums must be signed and dated.

2. The land lease, if applicable.

3. Surveys or legal descriptions, if available. Note that legal descriptions may vary depending on what is noted in public records and to avoid any discrepancies the prelim should be provided. Surveys are extremely helpful, particularly when the property does include private water and sewer systems as the distances are typically noted there.

4. Any other legal documents contained in the loan file. (This is a tough one! There are an awful lot of legal documents in a loan file and some of them are completely unrelated to the appraisal. Nonetheless, if you think it is relevant, you should probably attach it to the order.)

5. A point of contact and contact information for the mortgagee so that the appraiser can communicate any noncompliance issues. (I understand that a DE underwriter may not be assigned to a loan file at the same time that the appraisal order is processed, but that is of little concern to HUD. A name, email address and phone number should be included with the order.)

What can LOs do?

LOs can also prep the occupant for the FHA site visit and appraisers can do the same when calling to schedule. If there is an attic or crawl space, ensure that they are accessible. Replace any damaged or missing electrical cover plates. Install smoke alarms and CO detectors where needed (each state will post requirements on its website). For homes built before 1978, ensure that there is no peeling, flaking or defective paint surfaces on any structure or property improvements (yes, this includes fencing). If the property is on a private well or sewer, have the survey ready and point to its location when the appraiser is on site. If possible, have the occupant demonstrate that the appliances are all operational or at the very least that they are free of debris and clutter. Ask if there are any remodeling or other improvement projects taking place on the premises. Finally, for easy observation, ensure that the appraiser has complete access to all rooms, outbuildings, etc. Reducing the number of site visits, or surprises, for that matter, is the ultimate time saver. And contrary to popular belief, appraisers are not interested in completing 1004Ds or CIRs if they can be avoided on the first site visit.

Remember, HUD believes there were little to no changes, because the intent of the 4000.1 was to combine the 4150.2, 4905.1 and all mortgagee letters. The department’s goal was to combine both the mortgagee and appraiser’s responsibilities in one document with the intent of eliminating any confusion and minimizing the broad interpretations of the guidelines made by other parties. The 4000.1 is a living and breathing document; changes will be made to it and users should ensure that they are reading from the latest version.

After the dust fully settles, I believe the new handbook will have served its purpose well. I also believe, based on my experience with the NAA, that HUD is open to providing clarification when and where it is needed, so ask. Now, their clarifications may not come at a pace you and I would prefer, but they are coming.