a

GAO

United States Government Accountability Office

Report to Congressional Addressees

November 2004 SINGLE-FAMILY 

HOUSING

HUD’s Risk-Based 

Oversight of 

Appraisers Could Be 

Enhanced

GAO-05-14
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-14.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David G. Wood 

at (202) 512-6878 or woodd@gao.gov. 

Highlights of GAO-05-14, a report to 

congressional addressees 

November 2004

SINGLE-FAMILY HOUSING 

HUD’s Risk-Based Oversight of 

Appraisers Could Be Enhanced 

Through new guidance and regulation, HUD has strengthened its criteria for 

placing appraisers on its appraiser roster—which establishes their eligibility 

to participate in HUD programs. Before 1999, HUD relied largely on the 

states’ licensing processes to ensure that appraisers were qualified, but the 

states’ minimum licensing standards did not specifically include proficiency 

in HUD’s appraisal requirements. HUD’s 1999 guidance requires appraisers 

to, among other things, pass an examination on HUD appraisal methods and 

reporting. Further, a 2003 regulation provides for, among other things, 

removing from the roster appraisers whose licenses have been suspended or 

revoked. However, HUD has limited quality control over the approval 

process, limiting the department’s assurance that its criteria are being 

effectively implemented. 

HUD has adopted an oversight approach that focuses on appraisers it 

believes pose risks to FHA’s mortgage insurance fund, but certain 

weaknesses exist in its implementation. HUD’s guidance calls for its 

homeownership centers (HOCs)—which are largely responsible for 

appraiser oversight—to develop quarterly targeting lists of appraisers for 

review based on certain criteria, or risk factors. The primary factor is the 

rate of defaults in certain loans associated with the appraiser; others include 

large numbers of appraisals as well as appraisals for loans made under one 

of HUD’s programs known to be at higher risk of fraud and abuse. However, 

the HOCs do not maintain a permanent record of the data used to identify 

the targeted appraisers—even though HUD’s automated system would 

enable them to—which limits HUD’s ability to verify that those targeted 

were those that met the criteria and to determine the effectiveness of its 

targeting criteria in reducing risk to the mortgage insurance fund. GAO 

found that during fiscal year 2003 and the first half of fiscal year 2004 the 

HOCs generally reviewed the appraisers they identified as high risk and 

targeted for review. However, they reviewed fewer appraisals for each 

targeted appraiser than HUD’s guidance prescribes: on average, about 5.6 

appraisals instead of the 10 called for. GAO also found that HOC staff did 

not routinely visit appraised properties to verify the work of contractors who

conduct field reviews of selected appraisers. 

To facilitate enforcement actions against appraisers, HUD expanded the 

HOCs’ authority to sanction appraisers and developed a new appraisal 

scoring system. According to HUD, the number of actions taken to remove 

appraisers from its roster has increased from 25 at a cost of over $10 million 

in 1998 to 132 at a cost of under $300,000 in 2003. HUD also developed a tool 

that scores each appraiser on several appraisals, weighting the scores to 

capture violations that pose the greatest risk to FHA’s mortgage insurance 

fund. According to HUD, this tool allows the department to sanction 

appraisers more consistently. 

Incomplete or inaccurate 

appraisals resulting in property 

overvaluations may expose the 

Department of Housing and Urban 

Development’s (HUD) SingleFamily Mortgage Insurance 

programs—which insured about 3.7

million single-family mortgage 

loans with a total value of about 

$425 billion in fiscal years 2001 

through 2003—to greater financial 

risks. In 1999, GAO reported on 

the need for improvements in 

HUD’s oversight of appraisers, 

which has historically been a 

challenge for the department. Also, 

in the past, GAO reported that, due 

in part to poor oversight of 

appraisers, HUD’s Single-Family 

Mortgage Insurance programs 

remained a high-risk area. GAO 

conducted this review as a follow 

up to the 1999 report. This report 

examines (1) how HUD ensures 

that appraisers it approves are 

qualified to perform FHA 

appraisals, (2) the extent to which 

HUD employs a risk-based 

monitoring approach, and (3) 

HUD’s efforts to take enforcement 

action against noncompliant 

appraisers. 

GAO is making four 

recommendations aimed at 

enhancing HUD’s appraiser 

oversight processes. In responding 

to a draft of this report, HUD 

agreed with three of these 

recommendations, but disagreed 

with the presentation of its 

accomplishments as well as some 

of the findings. 
Page i GAO-05-14 HUD Appraiser Oversight

Contents

Letter 1

Results in Brief 2

Background 4

HUD Has Strengthened Its Criteria for Placing Appraisers on Its 

Roster, but Has Limited Assurance that These Criteria Are Being 

Implemented 7

HUD Focuses on Appraisers with Known Risks to FHA’s Mortgage 

Insurance Fund, but Weaknesses Exist in Implementing These 

Efforts 10

HUD Has Expanded the Authority of the HOCs and Developed an 

Appraisal Scoring System to Facilitate Enforcement Actions 15

Conclusions 21

Recommendations for Executive Action 22

Agency Comments 22

Appendixes

Appendix I: Scope and Methodology 26

Appendix II: Comments from the Department of Housing and Urban 

Development 28

Appendix III: GAO Contacts and Staff Acknowledgments 39

GAO Contacts 39

Staff Acknowledgments 39

Table Table 1: Number of Field Reviews Compared to Number of 

Removals, 1998–2003 18

Figures Figure 1: Appraisals as Part of the Home-Buying Process 5

Figure 2: Map of United States Showing HOC Regions and the 

Number of Appraisers in Each Region 6

Figure 3: Number of Appraisers Targeted and Reviewed by HOC 13

Figure 4: Average Number of Desk Reviews Performed on Each 

Appraiser Reviewed by HOC 14

Figure 5: Number of Appraisers Field Reviewed Compared to 

Number and Types of Sanctions Imposed during Fiscal 

Year 2003 and the First Half of Fiscal Year 2004 17

Figure 6: Appraisal Review Process Flow Chart 20
Contents

Page ii GAO-05-14 HUD Appraiser Oversight

Abbreviations

FHA Federal Housing Administration

GAO Government Accountability Office

HOC homeownership centers

HUD Department of Housing and Urban Development

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Page 1 GAO-05-14 HUD Appraiser Oversight

United States Government Accountability Office

Washington, D.C. 20548

A

November 5, 2004 Letr

The Honorable Paul Sarbanes

Ranking Minority Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Michael Oxley

Chairman

The Honorable Barney Frank

Ranking Minority Member

Committee on Financial Services

House of Representatives

Incomplete or inaccurate real estate appraisals resulting in property 

overvaluations could expose the Department of Housing and Urban 

Development’s (HUD) Federal Housing Administration (FHA)—which 

insured about 3.7 million single-family mortgage loans with a total value of 

about $425 billion in fiscal years 2001 to 2003—to greater financial risks.1

Effectively overseeing the appraisers who prepare appraisals for its 

Single-Family Mortgage Insurance programs has historically been a 

challenge for HUD. In April 1999, we reported that weaknesses in HUD’s 

appraiser approval, monitoring, and enforcement efforts pointed to the 

need for improvements.2

 We have also reported in the past that due in part 

to poor appraiser oversight, HUD’s Single-Family Mortgage Insurance 

programs remained a high-risk area for the department.3 Furthermore, 

HUD’s Inspector General noted in its most recent semiannual report to 

Congress that its audits and investigations continue to reveal fraud and 

abuse in HUD’s Single-Family Mortgage Insurance programs.4

1

FHA is a part of HUD, and the Assistant Secretary for Housing is also the Federal Housing 

Commissioner.

2

GAO, Single-Family Housing: Weaknesses in HUD’s Oversight of the FHA Appraisal 

Process, GAO/RCED-99-72 (Washington, D.C.: Apr. 16, 1999).

3

GAO, Major Management Challenges and Program Risks: Department of Housing and 

Urban Development, GAO-03-103 (Washington, D.C.: January 2003).

4

U.S. Department of Housing and Urban Development, Office of Inspector General, 

Semiannual Report to Congress, October 1, 2003 through March 31, 2004 (Washington, 

D.C.: Mar. 31, 2004).
Page 2 GAO-05-14 HUD Appraiser Oversight

We conducted this review at the initiative of the Comptroller General and 

as a follow up to our 1999 report. This report examines HUD’s processes 

for listing appraisers on its roster—which establishes their eligibility to 

participate in the department’s Single-Family Mortgage Insurance 

programs—and for overseeing the appraisers’ work. Specifically, this 

report examines (1) how HUD ensures that appraisers it approves to 

perform appraisals under its Single-Family Mortgage Insurance programs 

are qualified to be placed on the appraiser roster; (2) the extent to which 

HUD uses a risk-based approach when monitoring the appraisers 

participating in its Single-Family Mortgage Insurance programs; and (3) 

HUD’s efforts to take enforcement actions against appraisers it identifies as 

not complying with its requirements. We did not estimate the impact that 

HUD’s appraiser oversight has on the financial health of FHA’s mortgage 

insurance fund.

To address these objectives, we reviewed the activities of HUD’s 

headquarters and its four homeownership centers (HOCs) in Atlanta, 

Georgia; Denver, Colorado; Philadelphia, Pennsylvania; and Santa Ana, 

California. Specifically, we reviewed HUD’s process for approving 

appraisers to participate in its programs. Also, at each HOC, we obtained 

and analyzed data on the appraisers targeted for review by HUD during 

fiscal year 2003 and the first half of fiscal year 2004. In addition, we 

examined data on the types and number of enforcement actions HUD has 

taken against appraisers. We assessed the reliability of the HUD data we 

used by reviewing information about how the data were collected, and we 

performed electronic testing to detect obvious errors in completeness and 

reasonableness. We determined that the data were sufficiently reliable for 

the purposes of this report. We performed our work from December 2003 

to August 2004 in accordance with generally accepted government auditing 

standards. Appendix I provides additional details on our scope and 

methodology.

Results in Brief Through new guidance and regulation, HUD has strengthened its criteria 

for placing appraisers on its appraiser roster, but control weaknesses limit 

assurance that these criteria are being implemented. Before 1999, HUD 

relied largely on the states’ licensing processes to ensure that appraisers 

were qualified to perform appraisals, but the states’ minimum licensing 

standards did not specifically include proficiency in HUD’s appraisal 

requirements. In 1999, HUD issued guidance that required appraisers to (1) 

pass an examination on HUD appraisal methods and reporting; (2) meet 

either state licensing standards or certification standards based on criteria 
Page 3 GAO-05-14 HUD Appraiser Oversight

issued by the private Appraisal Qualifications Board;5 and (3) not be listed 

on various government and HUD excluded-party lists. Also, in 2003, HUD 

published a final rule making several changes to the licensing and 

certification requirements for the roster. Although HUD increased the 

requirements for placing appraisers on the roster, it has limited controls for 

assuring that only eligible appraisers are listed. Specifically, HUD does not 

routinely conduct quality control reviews of this process to ensure that it is 

being implemented appropriately.

HUD has focused its appraiser oversight efforts on appraisers that it has 

determined pose risks to FHA’s mortgage insurance fund, but weaknesses 

exist in implementing these efforts. HUD’s guidance calls for each HOC to 

target for review at least 30 appraisers each quarter, based on several risk 

factors. The primary risk factor is the “early default rate” of loans 

associated with the appraiser. (Early defaults are those that (1) occur 

within 12 months of loan origination and (2) represent a delinquency of 90 

days or greater.) From this initial pool of appraisers associated with high 

early default rates, the HOCs identify those appraisers who during the 

preceding year performed 10 or more appraisals and who performed 

appraisals for five or more defaulted mortgages. The HOCs also target for 

review appraisers who performed appraisals in connection with loans 

insured under HUD programs known to be at higher risk of fraud and 

abuse. Although it is the primary factor behind HUD’s targeting approach, 

the HOCs do not maintain a permanent record of the data used to identify 

the initial pool of appraisers for review each quarter. Because of this, we 

could not verify that the targeted appraisers were actually those that met 

HUD’s criteria. The HOCs generally reviewed the appraisers that were 

targeted as high risk. Specifically, the HOCs reviewed about 78 percent of 

the 936 appraisers placed on the target lists during fiscal year 2003 and the 

first half of fiscal year 2004. However, the HOCs did not perform as many 

desk reviews—analyses of written appraisal reports for completeness, 

compliance, and reasonable and logical conclusions of property value—per 

appraiser reviewed as HUD’s guidance calls for. Specifically, while the 

guidance instructs HOCs to perform desk reviews of at least 10 appraisals 

prepared by each appraiser reviewed, the HOCs performed, on average, 

about 5.6 desk reviews. Further, HUD staff did not routinely visit properties 

to verify the work of contractors responsible for conducting field 

5

The Appraiser Qualifications Board promulgates and maintains the Appraiser 

Qualifications Criteria, which all appraisers must meet in order to be certified by state 

appraiser regulatory agencies.
Page 4 GAO-05-14 HUD Appraiser Oversight

reviews—comprehensive inspections of appraised properties intended to 

assess the quality of written appraisals.

To facilitate enforcement actions against appraisers the department 

identifies as not complying with requirements and who pose a risk to FHA’s 

mortgage insurance fund, HUD has, among other things, expanded the 

HOCs’ authority to sanction appraisers and developed a new appraisal 

scoring system. A 2000 regulation authorized the HOCs to remove 

appraisers from the appraiser roster. This authority, in conjunction with the 

adoption of risk-based targeting of appraisers for review, has enabled HUD 

to increase sanctions while decreasing the number of field reviews. For 

example, according to HUD, the number of removal actions taken by the 

department has increased from 25 in 1998 to 132 in 2003, while the number 

of field reviews decreased from over 83,000 to 1,420. In 2002, HUD 

developed a Web-based tool, the Appraisal Review Process, which scores 

each appraiser on several appraisals, weighting the scores to capture 

violations that pose the greatest risk to FHA’s mortgage insurance fund. 

According to HUD, this tool allows the department to sanction appraisers 

more consistently. HUD has also issued a final rule providing that lenders 

who submit appraisals that do not meet HUD requirements are subject to 

the imposition of sanctions.

This report makes recommendations designed to enhance HUD’s processes 

for implementing its risk-based appraiser oversight. We provided a draft of 

this report to HUD for its review and comment. HUD agreed with three of 

our four recommendations, but disagreed with some of our findings and 

stated that our report does not recognize the significance of changes it has 

made to appraiser oversight. We clarified one of our findings in response to 

HUD’s comments, but we believe the report appropriately recognizes the 

changes made to HUD’s appraiser oversight.

Background Each year, HUD helps hundreds of thousands of Americans finance home 

purchases by insuring their mortgage loans. HUD insures private lenders 

against losses on mortgages for single-family homes—which HUD defines 

as structures with one to four dwelling units—and plays a particularly large 

role in certain market segments, including low-income borrowers and 

first-time homebuyers. The loan amount that HUD can insure is based, in 

part, on the appraised value of the home. The primary role of appraisals in 

the loan underwriting process is to provide evidence that the collateral 

value of the property is sufficient to avoid losses on loans if the borrower is 

unable to repay the loan. If a borrower defaults and the lender 
Page 5 GAO-05-14 HUD Appraiser Oversight

subsequently forecloses on the loan, the lender can file an insurance claim 

with HUD for nearly all of its losses, including the unpaid balance of the 

loan. After the claim is paid, the lender transfers the title of the home to 

HUD, which is responsible for managing and selling the property. Most of 

the mortgages are insured by FHA under its Mutual Mortgage Insurance 

Fund. To cover claims for lenders’ losses, FHA deposits insurance 

premiums paid by borrowers into the fund, which, historically, has been 

self-sufficient. Figure 1 shows the role appraisals play as part of the 

home-buying process.

Figure 1: Appraisals as Part of the Home-Buying Process

As figure 1 indicates, the purpose of a HUD appraisal is to (1) determine the 

property’s eligibility for mortgage insurance on the basis of its condition 

and location and (2) estimate the value of the property for mortgage 

insurance purposes.6

 In performing these tasks, the appraiser is required to 

identify any readily observable deficiencies impairing the safety, sanitation, 

structural soundness, and continued marketability of the property and to 

assess the property’s compliance with other minimum standards and 

requirements.

HUD maintains a roster of appraisers who have satisfied the requirements 

to be certified to perform HUD appraisals. Lenders underwriting mortgages 

to be insured by HUD must select one of the approximately 26,000 

appraisers listed on the appraiser roster to prepare an appraisal of the 

Buyer agrees

to purchase

property

Buyer applies

for mortgage

HUD

insures loan

Purpose

The purpose of a HUD appraisal is to (1) determine the property’s eligibility for mortgage insurance on the basis 

of its condition and location and (2) estimate the value of the property for mortgage insurance purposes.

Source: GAO.

Lender has

property

appraised

Appraisal

confirms value

of property

6

Estimating the value of the property for mortgage insurance purposes protects the lender 

from loaning more than the home is worth and minimizes the losses to HUD if the property 

has to be sold due to foreclosure.
Page 6 GAO-05-14 HUD Appraiser Oversight

mortgaged property. In fiscal year 2003, appraisers listed on HUD’s roster 

performed 902,118 appraisals for the purposes of HUD mortgage insurance.

HUD’s oversight of appraisers who appraise properties with mortgages 

insured by HUD is the responsibility of the Processing and Underwriting 

Divisions at the four homeownership centers (HOCs). The HOCs are 

located in Atlanta, Georgia; Denver, Colorado; Philadelphia, Pennsylvania; 

and Santa Ana, California. Figure 2 below shows the distribution of 

appraisers throughout the HOCs, each of which is responsible for a 

multistate region. The HOCs report directly to HUD’s Office of 

Single-Family Housing, which is responsible for implementing HUD’s home 

mortgage insurance programs and maintaining the appraiser roster.

Figure 2: Map of United States Showing HOC Regions and the Number of Appraisers in Each Region

Since the creation of the HOCs in 1998, their role with respect to HUD’s 

appraiser monitoring strategy has evolved. From fiscal year 1998 through 

2000, HUD instructed the HOCs to perform random field reviews for at 

least 10 percent of all loans insured by HUD. Starting in fiscal year 2000, 

HUD’s Real Estate Assessment Center assumed the responsibility of 

performing these field reviews for the HOCs and used an automated 

Source: GAO analysis of HUD data.

Philadelphia 

Atlanta 

Denver 

Santa Ana 5,000

6,624

7,243

7,269

Homeownership

center

Number of

appraisers
Page 7 GAO-05-14 HUD Appraiser Oversight

system—the Single Family Appraiser Subsystem—to review the quality of 

appraisals and identify those that were poorly prepared. However, HUD 

discovered that the majority of the appraisals identified as poor simply had 

documentation errors, and the system had failed to identify poorly 

performing appraisers who contributed to losses to the FHA mortgage 

insurance fund. 

In April 1999, we reported on HUD’s appraiser approval, monitoring, and 

enforcement efforts. We noted that HUD had limited assurance that the 

appraisers on its roster were knowledgeable about its appraisal 

requirements. We also reported that HUD was not doing a good job of 

monitoring the performance of appraisers and that HUD staff did not 

routinely visit appraised properties to determine the accuracy of field 

review contractors’ observations. In addition, we observed that HUD was 

not holding appraisers accountable for the quality of their appraisals and 

that HUD had not aggressively enforced its policy to hold lenders equally 

accountable with the appraisers they select for the accuracy and 

thoroughness of appraisals.

HUD Has Strengthened 

Its Criteria for Placing 

Appraisers on Its 

Roster, but Has Limited 

Assurance that These 

Criteria Are Being 

Implemented

HUD issued guidance and regulations in order to help ensure that 

appraisers it approves to perform appraisals under its Single-Family 

Mortgage Insurance programs are qualified to be placed on the appraiser 

roster. In 1999, the department issued guidance that required appraisers to, 

among other things, pass an examination on HUD appraisal methods and 

reporting. In 2003, HUD also issued regulations making changes to the 

licensing and certification requirements for the appraiser roster. Although 

HUD has strengthened its criteria for approving appraisers to perform 

appraisals, quality control over the approval process is limited. 

Guidance and Regulations 

Are Designed to Help 

Ensure Competency of 

Appraisers on FHA’s Roster

In November 1999, HUD issued new guidance under its Homebuyer 

Protection Plan—which was implemented in an attempt to increase the 

accuracy and thoroughness of HUD appraisals performed as part of the 

home-buying process—for placement and retention on the appraiser roster. 

As noted previously, lenders underwriting HUD loans must select 

appraisers from those listed on the roster to perform appraisals in 

connection with FHA-insured mortgages. Before 1999, HUD relied largely 

on the states’ licensing processes to ensure that appraisers were qualified 

to perform appraisals. However, the states’ minimum licensing standards 

did not include proficiency in HUD appraisal requirements. According to 
Page 8 GAO-05-14 HUD Appraiser Oversight

HUD’s new guidance, in order to be eligible for placement on the roster, an 

appraiser must (1) pass an examination on HUD appraisal methods and 

reporting; (2) be state licensed or state certified, with credentials based on 

the minimum criteria issued by the Appraiser Qualifications Board of the 

Appraisal Foundation;7

 and (3) not be listed on the General Services 

Administration’s Suspension and Debarment List, HUD’s Limited Denial of 

Participation List, or HUD’s Credit Alert Interactive Voice Response 

System.8

In May 2003, HUD published a final rule making several additional changes 

to the licensing and certification requirements for the roster.9

 Specifically:

• An appraiser who was included on the roster in June 2003, but did not 

meet the minimum Appraiser Qualifications Board licensing or 

certification criteria had 12 months to comply with these criteria and 

submit evidence of compliance to HUD. Failure to comply constituted 

cause for removal from the roster.

• An appraiser whose licensing or certification in a state has been 

revoked, suspended, or surrendered as a result of a state disciplinary 

action is automatically removed from the roster.

• An appraiser whose licensing or certification in a state has expired may 

not conduct HUD appraisals in that state.

7

The Appraisal Foundation is a not-for-profit educational organization established in 1987. In 

1989, the Financial Institutions Reform, Recovery, and Enforcement Act adopted the 

Appraiser Qualifications Board’s qualification criteria for professional appraisers. All 

state-certified appraisers must meet the Appraisal Qualifications Criteria, as imposed by the 

state appraiser regulatory agencies. The minimum licensing criteria, which are imposed by 

each state’s regulatory board, require that appraisers have 90 hours of classroom training in 

subjects relating to real estate appraisals, have 2,000 hours of appraisal experience, and 

pass its endorsed examination or an equivalent examination.

8

The Suspension and Debarment List is a governmentwide compilation of individuals and 

firms ineligible to participate in federal programs. The Limited Denial of Participation List 

includes all individuals who have been issued a limited denial of participation, which is an 

action that excludes a party from further participation in a HUD program area for generally 

one year. The Credit Alert Voice Interactive Response System is a database of delinquent 

federal debtors that allows federal agencies to reduce the risk to federal loan and loan 

guarantee programs.

9

See 68 Fed. Reg. 95 FR 26946 (May 16, 2003) Appraiser Qualifications for Placement on 

FHA Single Family Appraiser Roster; Final Rule.
Page 9 GAO-05-14 HUD Appraiser Oversight

HUD does not formally recertify appraisers whose licenses or certifications 

have expired or have been revoked. Instead, these functions are performed 

at the state level, and HUD is notified electronically, through an interface 

with state appraiser regulatory systems, to ensure that appraisers have 

passed the appropriate exams and that licenses have been renewed and 

through daily e-mails from the Appraisal Subcommittee to learn when 

licenses have been revoked.10 HUD is seeking to establish an electronic 

connection to the Appraisal Subcommittee, which would enable automatic 

notification when appraisers are sanctioned by states and when appraisers’ 

licenses or certifications need to be renewed.

Quality Control for 

Placement of Appraisers on 

Roster Is Limited

While HUD strengthened the requirements for approving appraisers for 

placement on the appraiser roster, quality control over approval 

procedures is limited. According to HUD’s guidance on placing new 

appraisers on the roster, HUD valuation staff are supposed to verify 

eligibility by checking (1) the Appraisal Subcommittee’s National Registry 

to ensure that the applicant is listed, (2) the General Services 

Administration’s Excluded Parties List System and HUD’s Limited Denial of 

Participation List to ensure that the applicant is not listed, and (3) the 

Credit Alert Interactive Voice Response System to ensure that the 

applicant’s social security number is not associated with any defaults or 

delinquencies in other federal loan programs. 

We found that HUD’s quality control for approving appraisers for 

placement on the roster is limited. According to HUD officials, the 

employees responsible for appraiser approval check to ensure the 

applications include all relevant information, verify that applicants are 

eligible to participate in HUD programs, and enter applicants’ names into 

the Computerized Homes Underwriting Management System. They 

perform the eligibility verifications manually, checking the aforementioned 

registries and lists to ensure that the applicant is appropriately listed. HUD 

officials explained that they are developing a contract to establish a system 

10The Appraisal Subcommittee was created as a federal entity and was charged with 

monitoring the implementation of Title XI of the Financial Institutions Reform, Recovery, 

and Enforcement Act of 1989. Title XI provides for national uniformity in appraisal 

standards and minimal national qualification requirements for appraisers. The Appraisal 

Subcommittee’s mission is to ensure that real estate appraisers who perform appraisals in 

real estate transactions that could expose the United States government to financial loss are 

sufficiently trained and tested to assure competency and independent judgment according 

to uniform high professional standards and ethics.
Page 10 GAO-05-14 HUD Appraiser Oversight

that will track these verifications. In addition, while HUD officials indicated 

that they do perform quality control on the roster placement procedures, 

this quality control is limited. A HUD official conducts quality control 

reviews over a random sample of the approving employees’ work, but not 

on a routine basis. HUD does not document these quality control reviews 

and could not provide evidence that they were performed. HUD officials 

indicated that they are planning to develop and implement a quality control 

plan for the appraiser approval process.

HUD Focuses on 

Appraisers with Known 

Risks to FHA’s 

Mortgage Insurance 

Fund, but Weaknesses 

Exist in Implementing 

These Efforts

HUD uses a risk-based targeting approach to identify appraisers for review. 

HUD has shifted its focus from targeting appraisals to targeting appraisers, 

modifying its approach in an attempt to more effectively identify and 

monitor appraisers most associated with known risks to FHA’s mortgage 

insurance fund. The HOCs have generally reviewed the appraisers targeted 

during fiscal year 2003 and the first half of fiscal year 2004, but the reviews 

have not consistently met HUD’s criteria for completeness. In addition, 

HUD has not performed adequate oversight of contractors who conduct 

field reviews of appraisals.

HUD Uses a Risk-Based 

Approach to Target 

Appraisers for Review

HUD’s process for monitoring appraisers is risk based. In 1999, we reported 

that HUD’s guidance called for random reviews of 10 percent of all 

appraisals. HUD modified this approach and now targets for review 

appraisers who are associated with known risks to FHA’s mortgage 

insurance fund, including those associated with a large number of 

defaulted loans, those who perform a large volume of appraisals, and those 

who appraise properties for loans with characteristics that are associated 

with high default and claim rates, including loans made under the 203(k) 

rehabilitation program, loans with nonprofit mortgagors, and loans for 

properties with multiple (three to four) units.11 HUD’s new approach is 

intended to identify poorly performing appraisers rather than poorly 

prepared appraisals. The goal of this approach is to remove from the 

appraiser roster appraisers who have not complied with HUD requirements 

and therefore pose a risk to FHA’s mortgage insurance fund, disqualifying 

them from doing business with HUD.

11The section 203(k) program is the department's primary program for the rehabilitation and 

repair of single-family properties.
Page 11 GAO-05-14 HUD Appraiser Oversight

The “early default rate” is the primary factor that HUD uses to identify 

poorly performing appraisers. On a quarterly basis, each HOC first 

identifies appraisers with the highest percentage of early defaults over the 

last 12-month period. Early defaults are defined as those that occur within 

12 months of loan origination and represent a delinquency—which occurs 

when the borrower is unable to honor the mortgage obligation—of 90 days 

or greater. Each HOC next identifies, from the pool of appraisers 

associated with high early default rates, those appraisers who performed 

10 or more appraisals and who performed appraisals for five or more 

defaulted mortgages. To do this, HUD uses its Neighborhood Watch Early 

Warning System—a Web-based software application that displays loan 

performance data for lenders and appraisers by loan types and geographic 

areas using FHA-insured single-family loan information—which was 

enhanced to include summary and loan level appraiser data to enable the 

targeting of appraisers for review. The system not only helps HUD target 

appraisers associated with a high rate of early defaults but also provides 

HUD the ability to identify and analyze patterns—by appraiser, geographic 

area, or originating lender—in loans that go into early default.

According to HUD’s guidance, each HOC must develop a target list of 

appraisers to be reviewed based on the targeting criteria. They also must 

review at least 30 appraisers each quarter, but these do not necessarily 

need to be pulled from the target lists. In addition to selecting appraisers 

using the targeting criteria, the HOCs also may review appraisers for other 

reasons. For example, HOC officials informed us that they also include on 

the targeting lists appraisers who have recently been sanctioned and have 

completed their sanction period. The officials indicated that this helps 

them to ensure that recently sanctioned appraisers have corrected their 

relevant deficiencies and do not repeat past performance problems. 

However, because this targeting criterion is not required, there is no 

assurance that it will be used consistently. The HOCs may also review 

appraisers based on complaints from homebuyers and referrals from other 

HUD offices. 

To help identify appraisers to be placed on the target lists, HUD has 

recently implemented a statistical risk-based appraiser-sampling algorithm. 

This algorithm helps to identify appraisers for desk and field reviews, 

focusing on those who are more likely to be associated with adverse 

outcomes, including (1) early default of an FHA insured loan, (2) large 

dollar amount of claims on the FHA mortgage insurance fund, or (3) 

severity of the net dollar loss on the FHA mortgage insurance fund. The 

algorithm also incorporates risk factors statistically related to these 
Page 12 GAO-05-14 HUD Appraiser Oversight

adverse outcomes, including appraiser workload, performance in high-risk 

programs, and geographical area. According to HUD, this enhanced and 

automated targeting helps to ensure the efficient use of resources for field 

reviews.

Because the HOCs do not maintain a permanent record of the data used to 

identify appraisers for review each quarter, we could not verify that the 

appraisers they placed on their target lists were actually those that met 

HUD’s criteria. The HOCs maintain general information about the reasons 

why appraisers are targeted for review, specifically labeling the reasons 

appraisers are targeted as “high default rate,” “high volume,” or high-risk 

loans or properties. However, they do not maintain specific early default 

rate information for the appraisers targeted, even though early default rate 

is the primary factor behind HUD’s targeting approach. The Neighborhood 

Watch Early Warning system allows HUD officials to maintain this 

information. For example, HUD uses this system to target lenders 

participating in its Single-Family Mortgage Insurance programs for review 

and maintains targeted lenders’ early default information. However, 

according to HOC officials, once the appraiser target lists are created, the 

HOCs do not maintain the targeted appraisers’ early default information. 

Without the specific default rate information, we were unable to determine 

whether the HOCs reviewed those targeted appraisers who posed the 

greatest risk based on high default rate. More importantly, in the absence of 

this information, HUD is unable to monitor the HOCs to ensure that the 

appropriate appraisers were targeted and reviewed based on its criteria 

and may be unable to determine the effectiveness of its targeting criteria in 

reducing risk to the mortgage insurance fund. 

HUD Reviewed Most 

Targeted Appraisers, but 

Reviews Were Not Always 

Complete

Overall, the HOCs reviewed 730 (almost 78 percent) of the 936 appraisers 

who were placed on the target lists during fiscal year 2003 and the first half 

of fiscal year 2004.12 However, as shown in figure 3, the percentage varied 

among the HOCs. Each HOC exceeded the goal of reviewing 30 appraisers 

per quarter. Specifically, they reviewed a total of 2,055 appraisers over this 

period, or an average of more than 85 appraisers per HOC per quarter. (In 

addition to the 730 appraisers who were reviewed because they were on 

the target lists, the HOCs reviewed 1,325 appraisers who were not on the 

target lists but were reviewed based on other reasons, including complaints 

12The number of appraisers reviewed refers to the number of appraisers that were desk or 

field reviewed, unless specified otherwise.
Page 13 GAO-05-14 HUD Appraiser Oversight

from homebuyers and referrals from other HUD offices, for a total of 2,055 

appraisers reviewed.) HOC officials explained that they are not always able 

to conduct reviews of the appraisers within the quarter targeted because of 

resource constraints, but indicated that they eventually perform reviews of 

all targeted appraisers.

Figure 3: Number of Appraisers Targeted and Reviewed by HOC

HUD’s guidance calls for the HOCs to conduct desk reviews of 10 

appraisals prepared by each appraiser identified for review through the 

targeting methodologies. The HOCs are to use a standard set of desk 

review criteria, the focus of which is to identify deficiencies in the content 

and format of the reported data. The appraisal report is to be analyzed for 

reasonable and logical conclusions of value to determine if the appraisal 

data are consistent with FHA requirements.

However, the HOCs did not review every appraiser to the extent called for 

in the guidance. The HOCs performed, on average, about 5.6 desk reviews 

Source: GAO analysis of HUD data.

Santa Total

Ana

Atlanta Denver Philadelphia

82%

43%

91%

84%

78%

Targeted appraisers reviewed

Targeted appraisers not yet reviewed

Appraisers reviewed

0

200

400

600

800

1,000
Page 14 GAO-05-14 HUD Appraiser Oversight

for each appraiser reviewed during fiscal year 2003 and the first half of 

2004. As shown in figure 4, the Philadelphia HOC was the only HOC that 

conducted almost 10 desk reviews for each appraiser reviewed during this 

period. Officials from the other HOCs explained that an appraiser might 

have conducted fewer than 10 appraisals, and so the HOCs would be 

unable to perform the required number of desk reviews. However, as noted 

earlier, HUD’s targeting criteria provide that from the pool of appraisers 

associated with high early default rates, those appraisers performing 10 or 

more appraisals and with five or more defaulted cases should be targeted.

Figure 4: Average Number of Desk Reviews Performed on Each Appraiser Reviewed 

by HOC

HOC officials also told us that they attempt to perform desk reviews of 

appraisals that were conducted no more than one year prior to the time of 

the review and that, if possible, they try to perform these reviews on the 

appraisers’ 10 most recent appraisals. While this approach is not required, 

HOC officials explained that it helps them to ensure that an appraiser’s 

most recent work is being reviewed and that appraisals are not outdated at 

the time of review.

0

2

4

6

8

10

Santa Average

Ana

Atlanta Denver Philadelphia

Desk reviews

Source: GAO analysis of HUD data.

Guidance benchmark:

10 desk reviews
Page 15 GAO-05-14 HUD Appraiser Oversight

HUD Conducted Limited 

Oversight of Field Review 

Contractors

According to HUD guidance, if a desk review concludes that an appraisal is 

inconsistent or unacceptable, then a field review is warranted on up to five 

appraisals prepared by that appraiser. HUD uses contractors and HUD 

employees who are qualified as appraisers to conduct field reviews. The 

review consists of a comprehensive inspection of the subject property’s 

interior and exterior, with the reviewer reporting any readily observable 

defective conditions (whereby the property does not meet minimum 

property standards as laid out in HUD’s guidance). The reviewer also must 

perform an exterior inspection of the comparable properties—other 

recently sold properties with similar features used to help the appraiser 

estimate the value of the subject property—submitted in the original 

appraisal and must verify all data reported by the original appraiser for the 

subject property and comparables.

We found that HUD staff do not routinely visit appraised properties to 

verify the work of the field review contractors. According to HUD 

guidance, on-site monitoring reviews by HUD staff are essential for 

high-risk program participants to the extent practicable. HUD officials 

explained that they are constrained by limited travel resources and so are 

not able to make on-site visits to properties. HUD officials agreed contract 

oversight is important but indicated that it is often not cost efficient to send 

employees on site to review contractors’ work because many of the 

department’s contractors are responsible for reviewing only a few 

properties. However, HUD officials indicated that they are planning to 

develop a cost-efficient oversight mechanism.

HUD Has Expanded 

the Authority of the 

HOCs and Developed 

an Appraisal Scoring 

System to Facilitate 

Enforcement Actions

Expanded authority giving HOCs the ability to sanction appraisers has 

provided the HOCs with additional enforcement options. According to 

HUD officials, by expanding their ability to sanction appraisers and by 

focusing oversight on appraisers instead of appraisals, they are able to 

effectively and efficiently impose sanctions on appraisers. HUD reviews 

and quantifies appraisers’ work by using a Web-based tool, the Appraisal 

Review Process, a system that scores each appraiser on several appraisals, 

weighting the scores to capture violations that pose the greatest risk to 

FHA’s mortgage insurance fund. According to HUD, the system helps to 

make the process of sanctioning appraisers more consistent. In addition, 

HUD has issued a final rule to hold lenders accountable for poor appraisals. 

Lenders who submit appraisals that do not meet HUD requirements are 

now subject to the imposition of sanctions by the department. 
Page 16 GAO-05-14 HUD Appraiser Oversight

Devolution of Authority and 

Risk-Based Targeting Assist 

HOCs in Sanctioning 

Appraisers

In 2000, a HUD regulation expanded its ability to sanction appraisers at the 

national level by giving the HOCs the authority to remove appraisers from 

the roster.13 As figure 5 illustrates, for the 1,004 appraisers field reviewed by 

HUD in fiscal year 2003 and the first half of fiscal year 2004, 620 sanctions 

were imposed, with 180 appraisers having been removed from the 

appraiser roster.14 Prior to receiving this expanded authority, the only 

enforcement tool at the HOCs’ disposal was issuance of limited denials of 

participation.15 However, the HOCs needed to refer limited denials of 

participation to headquarters, and the sanctions were only effective in the 

particular HOC’s jurisdiction for a year. Currently, the sanctions available 

to the HOCs include removal from the roster for 6 to12 months, removal 

from the roster in conjunction with education for 6 to12 months, education 

for up to 90 days, notices of deficiency, and limited denials of 

participation.16 Other sanctions available to HUD through headquarters 

include suspension—often used as a temporary measure to stop an 

appraiser from doing business with HUD until a more serious action can be 

taken—for up to 12 months or until the conclusion of legal or debarment 

proceedings; debarment, which removes an appraiser from the FHA roster, 

generally for up to 3 years; and civil and criminal penalties.17 In fiscal year 

2003 and first half of fiscal year 2004, HUD reports that it suspended 14 

appraisers from the roster and did not debar or impose civil or criminal 

penalties on any appraisers. HUD officials stated that these sanctions are 

1365 Fed. Reg. 49004 (Aug. 10, 2000); see 24 CFR part 200.204.

14Of the 2,055 appraisers who were desk or field reviewed during fiscal year 2003 and the 

first half of fiscal year 2004, 1,004 were field reviewed. Because, according to HOC officials, 

most sanctions are based on findings from field reviews, we used the number of field 

reviews in our analysis.

15A limited denial of participation is an action usually taken by a HUD field office or the 

Deputy Assistant Secretary for Single Family Housing that excludes a party from further 

participation in a HUD program area for generally one year. 

16A notice of deficiency is a letter from the HOCs describing the deficiency and requires no 

further action by the appraiser. However, the notice is maintained by HUD in the appraiser’s 

file.

17HUD pursues civil sanctions by initiating an investigation of the alleged noncompliant 

action. Any findings and conclusions are submitted to HUD’s Office of the General Counsel 

or to the Enforcement Center. If either office determines that the investigation report 

supports an action, the office submits a written request to the Department of Justice for 

approval to pursue civil sanctions. If the noncompliant action is so egregious as to violate 

criminal law, the General Counsel or Inspector General refers the case to the Department of 

Justice to pursue criminal penalties.
Page 17 GAO-05-14 HUD Appraiser Oversight

harder to use and less timely so they focus their efforts on those sanctions 

they can use at the HOC level. Figure 5 illustrates the extent to which the 

department has made use of each type of enforcement action available, as 

reported by HUD.

Figure 5: Number of Appraisers Field Reviewed Compared to Number and Types of Sanctions Imposed during Fiscal Year 2003 

and the First Half of Fiscal Year 2004

In addition, HUD officials explained that by changing the oversight 

approach to focus targeting efforts on appraisers instead of appraisals they 

can now better focus oversight efforts on appraisers with known risks. 

Specifically, they reported that they can now review a smaller number of 

appraisers and use sanctions more effectively and efficiently. For example, 

HUD reports that since 1998, the number of removal actions taken by the 

department has increased, while the number of field reviews and the cost 

to the agency have decreased, as shown in table 1. 

Homeownership

center

Number of appraisers

Source: GAO analysis of HUD data.

Philadelphia

Atlanta

Denver

Santa Ana

Field reviewed

Removed

from roster

Sanctioned

with education

requirements

Issued a

notice of

deficiency

Issued a

limited denial

of participation Suspended Total sanctions

Available to HOCs

Available to HOCs

through headquarters

Sanctions

Total

227

230

219

328

1,004

58

54

44

24

180

54

97

41

45

237

1

0

0

0

1

3

0

8

3

14

186

203

132

99

620

70

52

39

27

188
Page 18 GAO-05-14 HUD Appraiser Oversight

Table 1: Number of Field Reviews Compared to Number of Removals, 1998–2003

Source: HUD.

a

HUD provided field review data from 1999 for HOC appraisal reviews and Real Estate Assessment 

Center appraisal reviews, because these centers each contributed to the costs and numbers of field 

reviews as well as the number of appraisers removed from the roster in 1999. However, the data from 

the Real Estate Assessment Center was provided as a total for fiscal year 1999 through December 

2001, with 30,000 total field reviews performed, 33 appraisers removed from the roster, and 

$46,134,248 in field review costs for this period. We took the average of this 3-year period and added 

this average to the 1999 Homeownership Center data in order to arrive at the data reported for 1999.

b

For fiscal years 2000 and 2001, we used the average of the 3-year period that was reported from the 

Real Estate Assessment Center data discussed above.

Risk-Based Appraisal 

Scoring System Is Designed 

to Help Ensure Consistency 

within and across HOCs

In 2002, HUD developed a monitoring and enforcement tool called the 

Appraisal Review Process, a risk-based appraisal scoring system that 

scores appraisers who are field reviewed. (Field-reviewed appraisers 

include those targeted and field reviewed by HUD on a quarterly basis as 

well as those who were not necessarily targeted but may have been field 

reviewed for a variety of reasons, including complaints from home buyers 

and referrals from other HUD offices.) In an attempt to ensure consistency 

within and across HOCs, HUD designed this tool to (1) weigh each field 

review question used to assess appraiser performance and (2) recommend 

actions to be taken against appraisers.18 The tool provides the rater with a 

systematic way of thoroughly examining the written appraisal and carrying 

out the corresponding field review. Based on the desk and field review 

data, the system yields a recommendation of removal, education, or notice 

of deficiency. For example, questions associated with appraisal factors that 

are considered to be of greater risk to the fund—such as the accuracy of 

market value of the property and characterization of repair 

Fiscal Year

Number of field 

reviews

Number of appraisers 

removed

Total costs of field 

reviews

1998 83,084 25 $10,773,605

1999a 135,674 32 $26,409,980

2000b 10,000 11 $15,378,082

2001 10,000 11 $15,378,082

2002 1,868 97 $300,000

2003 1,420 132 $255,000

18The field review questions follow the Uniform Residential Appraisal Report and the new 

Valuation Conditions Form, both of which are used to conduct FHA appraisals.
Page 19 GAO-05-14 HUD Appraiser Oversight

conditions—receive a higher weight and automatically result in a removal 

recommendation if the appraisal exceeds the maximum allowable points. 

The Appraisal Review Process tool allows HUD to review appraisers and 

impose sanctions on them in a systematic way. In 1999, we reported that 

HUD was not holding appraisers accountable for the quality of their 

appraisals and that the primary reason for HUD’s inability to pursue 

enforcement actions against poorly performing appraisers was poor record 

keeping. According to HUD officials, the Appraisal Review Process’s 

systematic approach to reviewing appraisers’ work and maintaining 

electronic records of appraisers’ performance has helped the HOCs 

maintain better documentation. The data manager at each HOC orders 

cases for each of the targeted appraisers and assigns them to a desk 

reviewer. Based on the results of the desk review, the desk reviewer can 

decide that a field review for a particular appraisal is warranted or that no 

further action is necessary. If a field review is warranted, the appraisal is 

assigned to a contractor or HUD employee, who measures the quality and 

accuracy of appraisers’ performance in the completion of the 

desk-reviewed appraisal and up to four other appraisals prepared by the 

targeted appraiser and inputs the results electronically into the Appraisal 

Review Process. Based on the desk and field review data, the system yields 

a recommendation of removal, education, or notice of deficiency. A HUD 

rater then looks at the field review score generated by the system, factors 

in past performance and results from other appraisals, and recommends a 

proposed action. The branch chief must concur before the appraiser is 

notified of the action, at which point the appraiser has 20 days to appeal. 

Figure 6 portrays the major steps of the Appraisal Review Process.
Page 20 GAO-05-14 HUD Appraiser Oversight

Figure 6: Appraisal Review Process Flow Chart

According to HUD’s guidance, once a recommended action is affirmed, the 

appraiser roster is updated to reflect the change. If the appraiser is 

removed from the roster, lenders cannot assign cases to the appraiser until 

the appraiser is reinstated. Further, if the appraiser violated any of the laws 

in the state in which the appraiser is licensed, then the appropriate state 

regulatory agency is notified.

Recent Rule Is Designed to 

Hold Lenders Accountable 

for Poor Appraisals

In 1999, we recommended that HUD determine its authority to hold lenders 

accountable for poor-quality HUD appraisals performed by the appraisers 

they select from the roster and issue policy guidance that sets forth the 

specific circumstances under which and actions by which HUD may 

exercise this authority. In July 2004, HUD issued a final rule clarifying 

lenders’ accountability for the quality of appraisals on properties securing 

FHA-insured mortgages. Specifically, the rule provides that lenders who 

submit appraisals that do not meet HUD requirements are subject to the 

imposition of sanctions by the department. The rule applies to both 

sponsor lenders, who underwrite loans, and loan correspondents, who 

originate loans on behalf of sponsor lenders. HUD believes these changes 

will help ensure better compliance with appraisal standards and ensure 

that homebuyers receive an accurate statement of appraised value. 

Appraiser

Data manager

HOC data manager

assigns desk reviewer

to targeted appraiser

Desk reviewer decides

whether a field review

is warranted

Branch Chief

concurs with

recommended action

Appraiser has 20

days to appeal action

Field reviewer measures

quality and accuracy

of appraiser's performance

Results from field

review are entered into

Appraisal Review Process,

which scores results

and recommends action

Appraiser targeting

10

files

Desk reviewer

Desk review

Contractor

or HOC employee

Field review

Appraisal

Review Process

Score

Remove

Educate

Rating

Appraiser

20

days

Appeal possible

Branch Chief

Branch review

Remove

STOP STOP STOP

STOP Possibile point where review stops and results in no action

Sources: GAO and Nova Development (images).

Notice of Deficiency
Page 21 GAO-05-14 HUD Appraiser Oversight

Conclusions The importance of accurate appraisals to HUD’s Single-Family Mortgage 

Insurance programs underscores the need for effective appraiser oversight. 

HUD relies on appraisals to ensure that the billions of dollars in mortgage 

loans it insures annually accurately reflect the value of the homes being 

mortgaged. Since our April 1999 report, HUD has taken a number of steps 

designed to ensure the qualifications of appraisers on its roster; improve 

the efficiency and effectiveness of its oversight, specifically by revising its 

guidance to focus on appraisers (rather than appraisals) and incorporating 

a risk-based monitoring approach; and facilitate enforcement actions by 

empowering HOCs and developing a scoring system to promote 

consistency. However, certain weaknesses in implementing these 

initiatives limit their ability to (1) lower HUD’s risk of insuring properties 

that are overvalued and (2) minimize potential losses to FHA’s mortgage 

insurance fund. Thus, opportunities exist to enhance HUD’s appraiser 

approval and monitoring efforts.

HUD’s process for verifying that appraisers meet all relevant criteria when 

applying for placement on its roster lacks effective quality control. An 

effective control process is essential for HUD to systematically assure and 

demonstrate that all eligibility criteria are verified with respect to 

appraisers applying for placement on the roster so they can perform 

appraisals in connection with HUD’s Single-Family Mortgage Insurance 

programs.

Further, while HUD’s guidance specifies criteria for targeting appraisers 

based on a set of known risk factors, it does not require the HOCs to target 

for review appraisers who have been recently sanctioned, even though the 

HOCs sometimes do so in order to ensure that the problem for which the 

appraiser was sanctioned has been resolved. Requiring this criterion for 

targeting appraisers for review could help assure that sanctioned 

appraisers will not repeat past performance problems. Similarly, HUD does 

not require that the HOCs maintain historical information, particularly data 

on the associated default rates of loans, used to target and select appraisers 

for review. Without this information, HUD cannot demonstrate that the 

appropriate appraisers are being systematically targeted and reviewed 

based on its criteria and may be unable to determine the effectiveness of its 

targeting criteria in reducing risk to the mortgage insurance fund. 

HUD rarely verifies the work of its field review contractors through on-site 

evaluations, weakening the department’s ability to ensure that contracted 

work is actually performed and to accurately assess the quality of the 
Page 22 GAO-05-14 HUD Appraiser Oversight

appraisals used to support the loans the department insures. While it 

entails costs, on-site monitoring is an essential part of any monitoring 

process and is an important way to verify that work is actually being 

conducted and to accurately assess the quality of appraisals.

Recommendations for 

Executive Action

To reduce the financial risks assumed by HUD and to further enhance its 

oversight of appraisers participating in HUD’s Single-Family Mortgage 

Insurance programs, we recommend that the Secretary of HUD direct the 

Assistant Secretary for Housing-Federal Housing Commissioner to

• institute reasonable controls on the process of placing appraisers on the 

appraiser roster to ensure that applicants’ conformance to eligibility 

criteria is verified;

• consider a requirement to include, when targeting appraisers for review, 

those appraisers who have recently completed a sanction period in 

order to ensure that these appraisers have corrected their relevant 

deficiencies;

• maintain the historical information, particularly early loan default 

information, used to target appraisers for review in order to ensure that 

the HOCs target and review appraisers based on the criteria in HUD 

guidance; and

• implement a cost-effective field review contractor oversight process 

that includes on-site monitoring.

Agency Comments We provided a draft of this report to HUD for its review and comment. In 

written comments from HUD’s Assistant Secretary for Housing–Federal 

Housing Commissioner, HUD agreed with three of our four 

recommendations, but disagreed with our presentation of its 

accomplishments as well as some of our findings. The full text of HUD’s 

comments appears in appendix II.

HUD agreed with three of our recommendations. Specifically, it agreed to 

consider a requirement to include, when targeting appraisers for review, 

those appraisers who have recently completed a sanction period. Also, the 

department agreed to modify its system to archive quarterly reports in 

response to our recommendation that it maintain the historical information 
Page 23 GAO-05-14 HUD Appraiser Oversight

used to target appraisers for review. Further, it agreed to consider 

implementing a cost-effective field review contractor oversight process 

that includes on-site monitoring.

However, HUD disagreed with our recommendation that it institute 

reasonable controls on the process of placing appraisers on the appraiser 

roster. HUD commented that our report inaccurately stated that HUD does 

not document all verifications of appraisers’ eligibility for the roster and 

has limited quality control over the approval process, noting that the 

department has a paper record of the application review process whereby 

each applicant’s eligibility is verified and documented. HUD also noted that 

we did not review its paper records of the application review process. We 

modified the report to clarify that our primary concern was quality control, 

in general, and not solely documentation. We did not review the paper files 

because it was not our objective to test whether or not specific 

verifications had been performed, but rather to examine the overall 

verification and documentation procedures HUD relies on to ensure that 

appraisers meet its criteria. In doing so we observed a control weakness 

and we modified the report to clarify this weakness. Specifically, a HUD 

official conducts quality control reviews over a random sample of the 

approving employees’ work, but not on a routine basis. Also, HUD does not 

document these quality control reviews and could not provide evidence 

that they were performed. At a meeting to discuss the results of our review, 

HUD’s acting Deputy Assistant Secretary for Single-Family Housing and the 

Director of the Office of Single-Family Program Development agreed that 

they do not systematically document that all of the verifications have been 

conducted and explained that they are developing a contract to establish a 

system that will track these verifications. They also indicated that they are 

planning to develop and implement a quality control plan for the appraiser 

approval process. We modified the recommendation to emphasize that 

HUD should institute reasonable quality controls on the process of placing 

appraisers on the appraiser roster.

HUD commented that while we acknowledged that it implemented policy 

and procedural changes, we did not recognize the significance of these 

changes, and that it is appropriate and necessary for our report to clearly 

present and highlight these significant achievements. While we agree that 

HUD has made significant improvements, our objectives concern HUD’s 

appraiser oversight as it currently exists, regardless of past weaknesses. 

Nevertheless, we noted a number of specific improvements in the draft 

report. Specifically, we noted that the number of removal actions taken by 

the department has increased, while the number of field reviews and the 
Page 24 GAO-05-14 HUD Appraiser Oversight

cost to the agency have decreased, as represented in table 1. With respect 

to HUD’s adoption of a new risk-based approach for monitoring appraisers, 

we reported that HUD’s process for monitoring appraisers is risk based and 

that HUD modified its approach to target for review appraisers who are 

associated with known risks to FHA’s mortgage insurance fund. In addition, 

we reported that the department issued guidance that required appraisers 

to, among other things, pass an examination on HUD appraisal methods 

and reporting. We also noted that HUD issued several rules and mortgagee 

letters to strengthen its oversight and control of appraisers and improve 

appraisal quality.

HUD also disagreed with the accuracy of some of our findings. Specifically, 

HUD characterized as inaccurate our statement that in the absence of 

historical early default rate information, the department may be unable to 

determine the effectiveness of its appraiser targeting criteria in reducing 

risk to the mortgage insurance fund. HUD explained that its system directly 

targets the appraisers that pose the greatest risk to the fund. We concur 

that HUD’s process is designed to so target, and our draft characterized the 

approach as risk based and described the specific criteria HUD’s process 

calls for to target appraisers for review. However, because the HOCs do not 

maintain a permanent record of the data showing which appraisers met the 

criteria in each quarter, we could not verify that the appraisers the HOCs 

placed on their target lists were actually those that met HUD’s criteria. 

Similarly, without these records, HUD is unable to determine whether the 

HOCs reviewed those appraisers who met the criteria. In turn, this limits 

HUD’s ability to determine, over time, the effectiveness of its targeting 

criteria in reducing risk to the mortgage insurance fund. HUD went on to 

say that FHA would modify its system to archive quarterly reports in order 

to maintain the historical targeting records. 

In addition, HUD disagreed that it conducted limited oversight of field 

review contractors and that such efforts are affected by limited travel 

resources. HUD explained that it conducts a 100 percent review of 

contractors’ work and that the HOCs do not conduct on-site reviews 

(which may require travel resources) because the 100 percent review 

method serves as an appropriate and effective risk-control measure. As we 

noted in our report, HUD’s guidance states that on-site monitoring reviews 

by HUD staff are essential for high-risk program participants to the extent 

practicable. Further, HOC officials told us that they are constrained by 

limited travel resources and so are not able to make on-site visits to 

properties. At a meeting to discuss the results of our review, HUD’s acting 

Deputy Assistant Secretary for Single-Family Housing and the Director of 
Page 25 GAO-05-14 HUD Appraiser Oversight

the Office of Single-Family Program Development agreed that contract 

oversight is important but indicated that it is often not cost efficient to send 

employees on site to review contractors’ work because many of the 

department’s contractors are responsible for reviewing only a few 

properties. However, as we reported in our draft, these officials indicated 

that they are planning to develop a cost-efficient oversight mechanism.

Finally, HUD disagreed with our conclusion that weaknesses in 

implementing its appraiser oversight initiatives limit the department’s 

ability to (1) lower its risk of insuring properties that are overvalued and 

(2) minimize potential losses to FHA’s mortgage insurance fund. HUD also 

stated that our recommendations would not affect FHA’s risk. As we stated 

in the draft report, we did not attempt to estimate the impact that HUD’s 

appraiser oversight has on the financial health of FHA’s mortgage insurance 

fund. While we agree that HUD’s new targeting methodology is intended to 

reduce risks to FHA, our concern is whether the methodology is operating 

as intended. Our recommendations relate to the implementation of 

processes that are directed at controlling and minimizing risk and we 

continue to believe that opportunities exist to enhance HUD’s appraiser 

approval and monitoring. 

We are sending copies of this report to the Secretary of HUD. We will also 

make copies available to others upon request. In addition, the report will be 

available at no charge on the GAO Web site at http://www.gao.gov.

Should you or your staff have questions or comments on matters discussed 

in this report, please contact me at (202) 512-6878 or woodd@gao.gov, or 

Paul Schmidt, Assistant Director, at (312) 220-7681 or schmidtpj@gao.gov. 

Major contributors to this report are listed in appendix III.

David G. Wood

Director, Financial Markets

 and Community Investment
Page 26 GAO-05-14 HUD Appraiser Oversight

Appendix I

Scope and Methodology ApApenednxidexiIs

To examine how HUD ensures that appraisers it approves to perform 

appraisals under its Single-Family Mortgage Insurance programs are 

qualified to be placed on the appraiser roster, we reviewed pertinent HUD 

regulations and policy guidance and the minimum licensing criteria 

established by the Appraiser Qualifications Board of the Appraisal 

Foundation. In addition, we discussed this information with officials from 

HUD’s Single-Family Housing Office of Program Development. Further, we 

met with the staff member responsible for maintaining the FHA appraiser 

roster and observed the process for adding approved appraisers to the 

roster.

To assess the extent to which HUD uses a risk-based approach when 

monitoring appraisers, we interviewed officials at the four HOCs and 

observed a demonstration of their quarterly targeting procedures. We 

reviewed HUD’s risk-based targeting guidance and obtained data for fiscal 

year 2003 through the first half of fiscal year 2004 from each of the HOCs. 

We then compared each of the HOCs’ appraiser target lists to their desk and 

field review lists to determine the number of targeted appraisers that were 

actually reviewed. Further, from each of the HOCs’ desk review lists, we 

calculated the numbers of desk reviews performed by the HOCs on each 

appraiser reviewed in order to assess whether the HOCs have been 

following HUD’s guidance.

To examine HUD’s efforts to take enforcement actions against appraisers it 

identifies as not complying with its requirements, we reviewed HUD’s 

guidance regarding enforcement actions taken against poorly performing 

appraisers. We also discussed enforcement issues with officials from 

HUD’s Office of Single-Family Housing and the Departmental Enforcement 

Center. At the HOCs, we discussed the Appraisal Review Process and the 

HOCs’ ability to sanction appraisers. We obtained data generated from the 

Appraisal Review Report on HUD’s sanctions imposed between fiscal year 

2003 and the first half of fiscal year 2004 and compared this data to the 

number of field reviews conducted during the same time period. We 

focused this analysis on removals because removals are the strongest type 

of action that can be taken at the HOC level.

We assessed the reliability of the HUD data we used by reviewing 

information about how the data were collected, and we interviewed HUD 

officials to determine the completeness and accuracy of the data provided. 

We performed electronic testing on the data elements used for our analysis 

to detect obvious errors in completeness and reasonableness. We 
Appendix I

Scope and Methodology

Page 27 GAO-05-14 HUD Appraiser Oversight

determined that these data were sufficiently reliable for the purposes of 

this report.

Finally, we discussed appraiser oversight issues with officials from the 

Appraisal Subcommittee, the Appraisal Foundation, the Appraisal Institute, 

the Federal Home Loan Mortgage Corporation, and the Federal National 

Mortgage Association.

We performed our work from December 2003 through August 2004 in 

accordance with generally accepted government auditing standards.
Page 28 GAO-05-14 HUD Appraiser Oversight

Appendix II

Comments from the Department of Housing 

and Urban Development ApendxiI
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 29 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 30 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 31 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 32 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 33 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 34 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 35 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 36 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 37 GAO-05-14 HUD Appraiser Oversight
Appendix II

Comments from the Department of Housing 

and Urban Development

Page 38 GAO-05-14 HUD Appraiser Oversight
Page 39 GAO-05-14 HUD Appraiser Oversight

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contacts David G. Wood, (202) 512-6878

Paul Schmidt, (312) 220-7681

Staff 

Acknowledgments

Staff members who made key contributions to this report include Eric 

Diamant, Mark Egger, Harold Fulk, Nadine Garrick, Curtis Groves, John 

McGrail, Mark Molino, Josephine Perez, David Pittman, Terry Richardson, 

and Paige Smith.

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