|A proposed rule by the U.S. Department of Housing and Urban Development (HUD) has lenders and appraisers on opposite sides of the fence.
At issue is a proposed rule which HUD says makes lenders strictly accountable for the quality of appraisals on mortgages insured by the Federal Housing Administration (FHA). The rule -- which would apply to sponsor lenders, who underwrite loans, and correspondent lenders, who originate loans on behalf of their sponsors -- specifically provides that lenders submitting appraisals to HUD that do not meet FHA requirements are subject to the imposition of sanctions by HUD's Mortgagee Review Board.
HUD said that while most FHA appraisers perform appraisals in accordance with FHA standards, there are some instances in which some lenders tacitly require appraisers to make the value match the sales price to ensure that a mortgage loan closes for the appraiser to obtain additional business. Adding to the madness, HUD says, are fraudulent flipping schemes.
HUD suggests using Automated Valuation Models, reviewing appraisal documentation and performing quality assurance reviews as ways to satisfy FHA requirements.
"Hallelujah, it's about time," said a spokesman for the Appraisal Institute in January. "I wish they had done this years ago. This is a direct FHA homebuyer and consumer benefit, and will go a long way toward addressing the problem of inappropriate client pressure on the appraiser."
"We, as representatives of the entire spectrum of FHA lenders, strongly object to this proposed rule," read a joint announcement from a coalition of banking and mortgage organizations, including the Mortgage Bankers Association of America (MBA). "We believe that HUD is moving beyond the bounds of accepted business practices and Congressionally delegated authority to implement a rule that may diminish the effectiveness of FHA insurance."
Among the reasons cited in the announcement was that FHA does not have the statutory or regulatory authority to hold lenders equally accountable for appraisals. The announcement suggested that the rule may prompt lenders to seek non-FHA mortgages or increase the costs to borrowers to compensate for this transfer of risk.
"In addition, we recommend that FHA consider imposing additional insurance bonding requirements on appraisers that choose to provide appraisals on FHA loans," the announcement went on. "The appraisers should also be required to expressly certify that they understand the appraisal will be used in the underwriting of an FHA-insured mortgage loan."
"Although lenders may bemoan the unfairness of accountability for appraiser misdeeds, HUD's proposal corrects for the reverse phenomenon of lenders urging appraisers to engage in fraud," the National Community Reinvestment Coalition (NCRC) wrote to HUD in February. "HUD's proposal would likewise boost appraiser integrity by holding lenders equally liable for fraudulent appraisals." NCRC considers itself an advocate of greater fairness and safeguards in U.S. financial systems.