Each year, FHA helps hundreds of thousands of Americans finance home purchases. Established under the National Housing Act, FHA insures private lenders against losses on mortgages for single-family homes. FHA plays a particularly large role in certain market segments, including low-income borrowers and first-time homebuyers. The loan amount that FHA can insure is based, in part, on the appraised value of the home. 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 to 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 (Fund). To cover lenders’ losses, FHA deposits insurance premiums paid by borrowers in the Fund and historically, the Fund has been self-sufficient. The purpose of an FHA 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 visible deficiencies impairing the safety, sanitation, structural soundness, and continued marketability of the property and to assess the property’s compliance with FHA’s other minimum property standards. According to HUD’s guidance, if an appraiser finds noncompliance with these standards, the appraiser should include in the appraisal report an appropriate and specific action to correct the deficiency. Private mortgage lenders making FHA-insured loans for single-family housing are required to select appraisers from FHA’s roster of about 31,500 state-licensed or -certified appraisers. In fiscal year 1998, 825,539 appraisals were performed for the purposes of FHA mortgage insurance. Ninety-six percent of these appraisals were for existing homes, while the remaining 4 percent were for newly constructed homes. On-site assessments of completed appraisals, known as field reviews, are HUD’s principal tool for monitoring the performance of the appraisers on FHA’s roster. In conducting a field review, a HUD staff person or contractor visits the appraised property to evaluate all aspects of the appraisal, including whether the value determination was reasonable and whether all needed repairs were identified. The field reviewer is required to document his or her findings on a standard HUD form and recommend a score using a scale from 1 to 5 (with 1 being unacceptable and 5 being excellent). As part of its 2020 Management Reform Plan announced in 1997, HUD consolidated the single-family housing activities of its 81 field offices into four HOCs, each of which is responsible for a multistate area. These activities include processing mortgage insurance and functions related to HUD’s oversight of appraisers and lenders participating in FHA’s programs. The HOCs are located in Denver, Colorado; Atlanta, Georgia; Philadelphia, Pennsylvania; and Santa Ana, California, and report directly to HUD’s Office of Insured Single-Family Housing, which is responsible for implementing FHA’s home mortgage insurance program. The consolidation of activities into the four HOCs was carried out in phases and was completed in December 1998. HUD has also established two new offices, the Real Estate Assessment Center and the Enforcement Center, which are expected to play important roles in HUD’s oversight of the FHA appraisal process. According to HUD officials, the Assessment Center’s responsibilities will include analyzing and tracking appraisal quality and appraiser performance, and the Enforcement Center’s responsibilities will include sanctioning appraisers, mortgage brokers, and lenders who do not comply with HUD’s requirements. On June 1, 1998, HUD announced a Homebuyer Protection Plan that outlined reforms that HUD intends to make to the FHA appraisal process. Specifically, the plan (1) requires that appraisals include a more thorough basic survey of the physical condition of homes; (2) requires lenders to inform potential homebuyers of defects found during appraisals; (3) requires appraisers to recommend complete, detailed inspections of homes if the appraisers find significant problems with the properties; (4) allows up to $300 of home inspection costs to be financed through FHA mortgages; and (5) imposes stricter accountability on appraisers and tougher sanctions on those who act improperly, including fines and potential prison sentences. HUD’s announcement did not identify a specific timetable for implementing the plan. HUD is not doing a good job of monitoring the performance of appraisers, thereby limiting the agency’s ability to assess the quality of appraisals used for FHA-insured loans. In fiscal year 1998, HUD performed about 81,000 field reviews of appraisals nationwide. However, three of the four HOCs did not meet HUD’s policy requirement to field review at least 10 percent of the FHA appraisals performed within their jurisdictions. In addition, HUD’s records for the first three quarters of fiscal year 1998 showed that over one-third of the appraisers who conducted 10 or more appraisals during that period did not have any of their work field reviewed. When field reviews were performed, many were not timely. At the HOCs we visited, we found that HUD staff did not routinely visit appraised properties to verify the work of field review contractors and that they lacked adequate systems for tracking consumers’ complaints about appraisals. In September 1997, HUD established a policy requiring its HOCs and field offices to field review no less than 10 percent of the appraisals conducted within their jurisdictions. HUD instituted this requirement in response to our July 1997 report, which showed that some HUD field offices were conducting few or no field reviews of appraisals. An official from HUD’s Office of Insured Single-Family Housing told us that once HUD consolidated its single-family housing activities into the four HOCs, the 10-percent standard no longer applied to HUD’s 81 field offices. Our analysis of HUD’s data showed that three of the four HOCs did not meet the 10-percent requirement in fiscal year 1998. Specifically, the Philadelphia, Denver, and Santa Ana HOCs reviewed 9.7, 8.3, and 8.1 percent of the total appraisals performed in their jurisdictions, respectively. The Atlanta HOC field reviewed 12.7 percent of the appraisals in its jurisdiction. HUD did not field review the work of thousands of appraisers who conducted 10 or more FHA appraisals during the period from October 1, 1997, through June 30, 1998. Our analysis showed that 25,560 appraisers performed FHA appraisals during that period. Of the 12,076 appraisers who performed 10 or more appraisals during that period, 4,465, or 37 percent, had not been field reviewed. Among these 4,465 appraisers, 49 percent had conducted between 10 and 19 appraisals, 20 percent had conducted between 20 and 29 appraisals, and 31 percent had conducted 30 or more appraisals. (See fig. 1.) While HUD’s procedures do not require field reviews for appraisers doing a higher volume of appraisals, HUD had little assurance that they were conducting accurate and thorough appraisals without performance information on these individuals. 10 to 19 appraisals (2,174) 20 to 29 appraisals (889) Philadelphia and Denver HOC officials told us that several factors contributed to problems with field review coverage. These factors included (1) HUD’s reliance on contractors to conduct field reviews and the unavailability of contract funds during the first several months of the fiscal year; (2) the reassignment of personnel during HUD’s reorganization, which, in some instances, left no one responsible for ordering field reviews; and (3) the lack of emphasis that some field offices placed on field reviews once they knew their functions would be transferred to the HOCs. HOC officials told us that they had placed a high priority on completing field reviews when they assumed this responsibility from the field offices but that they were constrained by the amount of time remaining in the fiscal year and the limitations on the number of field reviews that they could ask contractors to perform each month. As of February 1999, HUD was piloting a new process for selecting appraisals for field review. HUD plans to use statistical analysis of appraisal quality indicators (e.g., the completeness and mathematical accuracy of the appraisal report) to identify appraisals that may be problematic and, therefore, may be candidates for field review. According to HUD, this new process will allow the Department to target appraisers who may be performing poorly for field review instead of relying on the more random process now being used. Although HUD’s guidance states that timeliness is essential to ensure the quality of field reviews, a procedural change that HUD implemented in November 1997 has significantly reduced the timeliness of these reviews. Prior to November 1997, appraisers were required to send copies of their appraisal reports directly to HUD. This arrangement allowed HUD to field review some appraisals before the lenders closed on the loans and sent the remaining loan documents to HUD for approval of FHA mortgage insurance. However, effective November 1997, appraisers are no longer required to send their appraisal reports to HUD, and HUD does not get a copy of the appraisal report until the lender closes the loan and sends the appraisal report to HUD as part of the loan case file.