Single-Family Housing: HUD's Risk-Based Oversight of Appraisers Could Be Enhanced
Published: 2004-11-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Incomplete or inaccurate appraisals resulting in property overvaluations may expose the Department of Housing and Urban Development's (HUD) Single-Family Mortgage Insurance programs--which insured about 3.7million 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.
section_title: What GAO Found
paragraphs: 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 whoconduct 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.

section_title: Letter
paragraphs: 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.  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. 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. 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.
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.
subsections: section_title: Background
paragraphs: 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  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.
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. 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  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.
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  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.
section_title: HUD Has Strengthened Its Criteria for Placing Appraisers on Its Roster, but Has Limited Assurance that These Criteria Are Being Implemented
paragraphs: 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.
subsections: section_title: Guidance and Regulations Are Designed to Help Ensure Competency of Appraisers on FHA’s Roster
paragraphs: 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  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; 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.
In May 2003, HUD published a final rule making several additional changes  to the licensing and certification requirements for the roster. 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.
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. 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.
section_title: Quality Control for Placement of Appraisers on Roster Is Limited
paragraphs: 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  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.
section_title: HUD Focuses on Appraisers with Known Risks to FHA’s Mortgage Insurance Fund, but Weaknesses Exist in Implementing These Efforts
paragraphs: 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.
subsections: section_title: HUD Uses a Risk-Based Approach to Target Appraisers for Review
paragraphs: 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. 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.
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  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.
section_title: HUD Reviewed Most Targeted Appraisers, but Reviews Were Not Always Complete
paragraphs: 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. 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  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.
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  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.
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.
section_title: HUD Conducted Limited Oversight of Field Review Contractors
paragraphs: 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.
section_title: HUD Has Expanded the Authority of the HOCs and Developed an Appraisal Scoring System to Facilitate Enforcement Actions
paragraphs: 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.
subsections: section_title: Devolution of Authority and Risk-Based Targeting Assist HOCs in Sanctioning Appraisers
paragraphs: 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. 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. Prior to receiving this expanded authority, the only  enforcement tool at the HOCs’ disposal was issuance of limited denials of  participation. 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. 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. 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  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.
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.
section_title: Risk-Based Appraisal Scoring System Is Designed to Help Ensure Consistency within and across HOCs
paragraphs: 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. 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  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.
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.
section_title: Recent Rule Is Designed to Hold Lenders Accountable for Poor Appraisals
paragraphs: 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.
section_title: Conclusions
paragraphs: 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  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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments
paragraphs: 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  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  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  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.
section_title: Scope and Methodology
paragraphs: 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  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.
section_title: Comments from the Department of Housing and Urban Development
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: 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.