December 19, 2005

> MORTGAGEE LETTER 2005- ML-48

TO: ALL APPROVED MORTGAGEES

ALL APPROVED APPRAISERS

SUBJECT: FHA Repair and Inspection Requirements for existing properties
and revisions to FHA Appraisal Protocol

In September 2005, the Federal Housing Administration (FHA) issued
[Mortgagee Letter 2005-34]{.underline}, which announced the adoption of
four of Fannie Mae's revised appraisal reporting forms as well as the
release of Revised Appendix D of Handbook 4150.2, CHG-1. This Mortgagee
Letter provides additional guidance regarding FHA's repair and
inspection requirements for existing properties and the use of the
Fannie Mae appraisal reporting forms. All appraisal guidance for new
construction that serves as security for FHA-insured mortgages remains
unchanged beyond the clarification in the Revised Appendix D that the
appraiser may appraise a home that is under construction and that is 90%
or more complete without benefit of plans and specifications.

In a continuing effort to reform and standardize its appraisal
requirements, FHA has shifted from its historical emphasis on the repair
of minor property deficiencies and now only requires repairs for those
property conditions that rise above the level of cosmetic defects, minor
defects or normal wear and tear. FHA Roster Appraisers are reminded to
report **[all]{.underline}** readily observable property deficiencies,
as well as any adverse conditions discovered performing the research
involved in completing the appraisal, within the appraisal reporting
form. Lenders should use professional judgment and rely upon prudent
underwriting practices in determining when a property condition poses a
threat to the safety of an occupant and/or jeopardizes the soundness and
structural integrity of the property, such that additional inspections
and/or repairs are necessary.

Revisions to the appraisal reporting guidance contained in Chapters 2
and 3 of Handbook 4150.2, CHG-1 are limited to those described in this
Mortgagee Letter and Mortgagee Letter 2005-34 and Revised Appendix D.
The specific areas of guidance that are rescinded by this Mortgagee
Letter are delineated below. FHA intends to retire and replace Handbook
4150.2, CHG-1 in the near future.

**Repair Requirements**

As stated in Revised Appendix D, FHA now permits an "as-is" appraisal
for existing properties that serve as security for FHA-insured mortgages
when minor property deficiencies, which generally result from deferred
maintenance and normal wear and tear, do not affect the safety of the
occupants or the security and soundness of the property. FHA no longer
requires repairs for these types of minor cosmetic deficiencies to bring
a property into compliance with FHA Minimum Property Requirements.
Specifically, the guidance provided in Handbook 4150.2, CHG-1, Chapter
3, Paragraph 3-6, A-7 referencing all-weather road surfaces; Paragraph
3-6, A-8 referencing poor workmanship; Paragraph 3-6, A-11 referencing
debris and trash in crawl space; Paragraph 3-6, A-16 referencing steps
without a handrail; Paragraph 3-6, C referencing bare floors, badly
soiled carpeting and cracked plaster and sheetrock is no longer
applicable. Additionally, the guidance provided in Handbook 4905.1,
REV-1, Chapter 2, Paragraph 2-7, A-2 referencing all weather road
surfaces; Paragraph 2-8 referencing poor workmanship and Paragraph 2-14,
C referencing crawl spaces with debris and trash is no longer
applicable. Any reference to the Valuation Condition form (form
HUD-92564-VC) and protocol for its completion contained in Handbook
4150.2 is no longer applicable as well. Examples of minor property
conditions that no longer require automatic repair for **existing**
properties include, but are not limited to:

-   Missing handrails

-   Cracked or damaged exit doors that are otherwise operable

-   Cracked window glass

-   Defective paint surfaces in homes constructed post 1978

-   Minor plumbing leaks (such as leaky faucets)

-   Defective floor finish or covering (worn through the finish, badly
    soiled carpeting)

-   Evidence of previous (non-active) Wood Destroying Insect/Organism
    damage where there is no evidence of unrepaired structural damage

-   Rotten or worn out counter tops

-   Damaged plaster, sheetrock or other wall and ceiling materials in
    homes constructed post- 1978

-   Poor workmanship

-   Trip hazards (cracked or partially heaving sidewalks, poorly
    installed carpeting)

-   Crawl space with debris and trash

-   Lack of an all weather driveway surface

Examples of property conditions that may represent a risk to the health
and safety of the occupants or the soundness of the property for which
FHA will continue to require automatic repair for **existing**
properties include, but are not limited to:

-   Inadequate access/egress from bedrooms to exterior of home

-   Leaking or worn out roofs (if 3 or more layers of shingles on
    leaking or worn out roof, all existing shingles must be removed
    before re-roofing)

-   Evidence of structural problems (such as foundation damage caused by
    excessive settlement)

-   Defective paint surfaces in homes constructed pre-1978

-   Defective exterior paint surfaces in home constructed post-1978
    where the finish is otherwise unprotected.

Lenders must review the appraisal to determine whether the appraiser has
reported any property conditions that will affect the health and safety
of the occupants or the security and the soundness of the property and
must require immediate repair where the property condition poses a
threat to these criteria.

**Inspection Requirements**

> FHA no longer mandates automatic inspections for the following items
> and/or conditions in **existing** properties:

-   Wood Destroying Insects/Organisms: inspection required only if
    evidence of active infestation, mandated by the state or local
    jurisdiction, if customary to area, or at lender's discretion

-   Well (individual water system): test or inspection required if
    mandated by state or local jurisdiction; if there is knowledge that
    well water may be contaminated; when the water supply relies upon a
    water purification system due to presence of contaminants; or when
    there is evidence of:

> Corrosion of pipes (plumbing)
>
> Areas of intensive agriculture within ¼ mile
>
> Coal mining or gas drilling operations within ¼ mile
>
> Dump, junkyard, landfill, factory, gas station, or dry cleaning
> operation within ¼ mile
>
> Unusually objectionable taste, smell or appearance of well water
>
> (superceding the guidance in Mortgagee Letter 95-34 that requires well
> water testing in the absence of local or state regulations)

-   Septic: test or inspection required only if evidence of system
    failure, if mandated by state or local jurisdiction, if customary to
    the area, or at lender's discretion

-   Flat and/or unobservable roof

Consequently, the guidance provided in Handbook 4150.2, Chapter 3,
Paragraph 3-6, A-6 referencing mandatory termite inspections for any
structure that is ground level and for any structure where wood touches
the ground; Paragraph 3-6, A-5 referencing mandatory well and septic
tests; and Paragraph 3-6, A-12 referencing mandatory inspections for a
flat roof is no longer applicable. Additionally, the guidance provided
in Handbook 4905.1, REV-1, Chapter 2, Paragraph 2-5, B-1 referencing
mandatory well water tests is no longer applicable. In cases where well
tests are necessary, as described above, FHA's existing testing
standards outlined in Chapter 3, Paragraph 3-6, A-5a. of Handbook 4150.2
remain in effect and supercede Mortgagee Letter 95-34. If the appraiser
reports a potential property deficiency that may pose a threat to the
safety of the occupants or the security and soundness of the property,
the lender will require an inspection of the condition to determine
whether repairs are necessary to mitigate or resolve the problem.
Examples of conditions that will continue to require automatic
inspections include, but are not limited to:

-   Standing water against the foundation and/or excessively damp
    basements

-   Hazardous materials on the site or within the improvements

-   Faulty or defective mechanical systems (electrical, plumbing, or
    heating)

-   Evidence of possible structural failure (e.g., settlement or bulging
    foundation wall)

**Additional Changes to Appendix D, Valuation Protocol**

As a result of these changes in FHA's repair and inspection requirements
for existing properties, Revised Appendix D of Handbook 4150.2, CHG-1
has been updated. The following pages in Revised Appendix D have been
updated to reflect these changes: 2, 4, 19, 23, 27, 50, 55, 60, 85, 92,
112, 116 and 120. Revised Appendix D is attached to this Mortgagee
Letter and will be available online at:

http://www.hudclips.org/cgi/index.cgi

**Conditional Commitment Form**

Mortgagee Letter 2005-34 instructed the mortgagee to provide a copy of
the completed form HUD-92800.5B (Conditional Commitment Direct
Endorsement Statement of Appraised Value) to the mortgagor at least five
business days prior to loan closing. The five-business day delivery date
prior to loan closing of the Conditional Commitment form is hereby
rescinded and lenders are instructed to ensure that the mortgagor
receives either a completed copy of HUD 92800.5B, or a copy of the
completed appraisal report, at or before loan closing.

This Mortgagee Letter is effective for all appraisals performed on or
after January 1, 2006.

If you have any questions regarding this Mortgagee Letter, please
contact your local Homeownership Center (HOC) in Atlanta (888) 696-4687,
Denver (800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888)
827-5605.

> Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner

Attachment