Appraising the FHA — and the Mortgage Marketplace

by Jeffrey Hogue
March 25th, 2008

We all know that practically all lenders require a prospective borrower to obtain an appraisal before that lender will lend money. The reason for this is relatively obvious: the lender wants assurances regarding a property’s value in the event that the borrower defaults on the loan and the lender gets stuck with the property. The property’s appraised value will dictate the value of a loan that a lender is willing to make. Accordingly, the appraisal represents a very material part of the loan process.

The appraisers who complete the appraisals for the lenders act as the gatekeepers to whether a lender will make a loan or not. Identifying a well qualified appraiser (or gatekeeper) is pivotal to the lender. If an appraiser does a substandard job on one of his or her appraisals, then a lender could make a “bad” loan. Consequently, not only does the appraisal represent an important part to the loan transaction, but the appraiser himself plays an extremely important role in the loan process.

Speaking from experience, I can attest to the fact that some appraisers are better than others. Some appraisers, for example, will use six (6) comparable properties to appraise a property versus only using three (3) comparable properties. Along the same lines, some appraisers will determine whether there were any unique terms and/or concessions in the purchase contracts of the comparable sales they intend to use in their appraisal which would alter the actual appraised value, and some will not. Many appraisers approach the analysis from a purely objective perspective. However, some appraisers will succumb to the pressure of a mortgage broker who “needs” the property to appraise at a certain value, in which case, the appraiser will ”stretch” the appraisal value for a specific property in order for the loan to be consummated, resulting in repeat business from that mortgage broker.

Generally speaking, an appraiser must fulfill certain educational and experience requirements before he can become licensed in the specific state where he will perform appraisals. The FHA takes the process one step further. In short, in addition to the state requirements, the FHA requires that the appraiser take a closer look at the physical integrity of the property that he intends to appraise. (See HUD 92563 application; HUD Handbook 4150.2) In effect, FHA qualified appraisers act as pseudo physical inspectors. For example, FHA approved appraisers must inspect the roof to make sure that no moisture is entering the home; they must inspect the functionality of the toilets; they must check to make sure that property has running water; they must examine the electrical box of the property to ensure that there are no frayed or exposed wires, etc. (See HUD Handbook 4150.2)

For most readers, the above information will prompt a couple of questions: (1) does the FHA go far enough in what they require of appraisers; and (2) why aren’t other lenders adopting more stringent appraisal standards, like those of the FHA?

As to the first question, if the purpose is to assure that the property is appraised accurately, then I believe the answer is no. Applying the current FHA requirements, all it takes for a “bad” loan to be issued is one bad appraiser completing one bad appraisal. A better approach would be to institute a two–tier appraisal system where, instead of one appraiser doing all of the work, there would be a requirement for two independent appraisers to complete two independent appraisals for the property to be appraised. This would help keep appraisers accountable and prevent overreaching requests from mortgage brokers.

As to the second question, the answer is I don’t have an answer – I can only speculate. Perhaps it is because many lenders immediately resell their loans on the secondary market, in which case the motivation is obvious – the lender simply wants to consummate as many loans as possible. However, even secondary loan purchasers should require a more stringent set of appraisal standards before purchasing loans.


Attorney Jeffrey L. Hogue is a partner at the San Diego law firm of Hogue & Belong. Mr. Hogue is also a founder of the Mortgage Accountability Association.

  •  | 
  •  | 
  •  | 


This entry was posted on Tuesday, March 25th, 2008 at 1:24 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

2 Responses to “Appraising the FHA — and the Mortgage Marketplace”

  1. Carl Pruitt Says:

    This was once a bad problem. However, it is a problem which the market has already substantially solved on its own. There aren’t many lenders left, if any, who don’t have multiple levels of appraisal review by both automated systems and in-house appraisal review departments. Appraisals are routinely picked apart every way to Sunday once they are turned in for underwriting.

    As irritating as this procedural change has been to real estate agents, appraisers, mortgage brokers and even customers, it has been a very favorable development for the future of the mortgage industry.

    The days when one appraiser could get a bad appraisal through without it being challenged ended almost 2 years ago. The problem with appraisals over the last couple of years is not that they weren’t valid at the time of the loan, but that the foreclosures caused by mortgage fraud and ridiculously lenient loan programs have caused property values to crash.

    Please also note that HUD is very specific in warning that the appraiser is there to inspect the condition of the property for the benefit of HUD should a foreclosure occur. The borrower must sign specific disclosures stating that HUD recommends they have their own property inspection done.

  2. Marc Brinitzer Says:

    I agree that FHA appraisal requirements have provided an extra pound of prevention for the consumer. This has often been a hidden blessing for the first time buyer. Past FHA requirements turned the FHA appraiser into a quasi home inspector, and provided a check and balance against over-eager Realtors, lenders, inspectors and buyers.

    I also strongly believe that increased educational and experiential requirements are key to weeding out the bad people who jumped into appraisal and lending industries for the quick buck.

    So look at what is happening now. FHA has recently reformed itself and loosened its loan and appraisal requirements to match conventional loans. No more mandatory pest inspection and clearance of both Section I & Section II report items, no roof inspection, no buyer non-allowable costs (except tax service fee).

    And while Andrew Cuomo is busy negotiating with the GSE’s to take the choice of appraiser out of the mortgage broker’s hand–another retarded brainchild that will create more problems than it will solve–FHA is lowering the requirements for becoming an FHA appraiser, ensuring that those with less experience will now flood the FHA market. In tandem, these two trends will create opportunities for bad people to become bad appraisers and make lousy appraisals even more prevalent.

    As they say, guns don’t kill people, people do. Same goes for appraisals, loan, and uh…lawsuits.

Leave a Reply

Are you a Mortgage Lender specializing in FHA Loans? Join our mortgage directory today! Homeowners click here to appy for FHA Loans