FHA News & Info

FHA announced October 1, 2009 as the cutoff date for licensed appraisers. After this date, FHA will no longer accept appraisals from any licensed appraiser on the FHA roster. Any appraisal submitted by a lender with a licensed appraiser signing the report will require an additional appraisal from a certified FHA approved appraiser at the lender’s expense.

For those who did not know, October 1, 2008, was the date FHA stopped taking applications from licensed appraisers. Any application after that date must have been from a certified appraiser to be considered. FHA did not state when they would no longer accept any work from licensed appraisers leaving thousands of appraisers in limbo as to the future of their businesses.

This could be the beginning of the end for licensed appraisers in the mortgage industry. It is possible lenders will start requiring certified appraisers on all of their loans. Many appraisers began the process of upgrading before FHA made its announcement about the October 1, 2008 deadline. Those who have not will have a longer road ahead of them after the end of this year.

January 1, 2008 marked the change in appraiser qualifications to become licensed or certified. Certified appraisers now must go through 200 classroom hours of appraisal courses to be eligible to sit for the state exam. Prior to 1/1/08, the hours required were 120. Appraisers also need 2500 hours of experience; licensed appraisers already had a minimum of 2000 hours logged and need an additional 500 to upgrade to sit for the exam.

Appraisers who had the class room hours but not the experience hours or vice versa prior to 1/1/08 had until 1/1/09 to obtain the other hours they were missing to upgrade. This window will soon be closing requiring many appraisers to take the long route to upgrade.

Effective October 1, 2008 FHA stopped accepting applications from State Licensed appraisers and is only accepting applications from State Certified Appraisers. Current State Licensed appraisers on the FHA roster will be allowed to do FHA appraisals for the time being but eventually will have to upgrade to Certified in order to continue doing FHA appraisals. This is a result of the Housing Economic Recovery Act, signed July 30, 2008. 

All new applicants must also take an educational course dealing with FHA appraisals in order to be approved for the FHA roster. At this point in time, there is still no test requirement to be placed on the roster.

What this means for Loan Officers? Now more than ever you need to find appraisers who stay on top of their educational requirements. Especially when it comes to dealing with all of the recent changes to FHA.

Many inexperienced and/or under educated appraisers fell through the cracks when FHA allowed anyone and everyone to join the roster. Some of theses appraisers will remain on the roster because they are certified others will be taken off the list because they are not. Either way many didn't take any steps to learn FHA requirements and are only guessing at what FHA requires.

When dealing with an FHA appraiser you haven't used before be sure to ask them about their experience in dealing with FHA properties. Ask them when they became FHA approved and what FHA education they have. Every appraiser you use should have taken an FHA course in the past year or so regarding the new requirements.

There are some old school appraisers out there who are not up to date with the new requirements and could delay or kill a deal due to outdated requirements that get marked for repairs or inspections.

Here's a quick recap:

1. Licensed Appraisers can no longer apply for the FHA Roster

2. Only Certified Appraisers will be able to complete FHA appraisals

3. FHA education regarding the changes in FHA requirements is mandatory

4. Make sure your appraiser meets the requirements for FHA

There are many FHA appraisers to choose from. Choose wisely!

FHA realized that they dropped the ball back on February 7, 2008, when they lowered the requirements to become an FHA approved appraiser. Basically if you were an appraiser and you had a pulse you could join the FHA roster.

FHA has been like a knight in shining armor to the lending world as it slays the ARM dragon and helps the homeowner damsels in distress. This fairy tale world was created in part by the serious lack of lending standards in place during the refinance boom. Basically if you were a homeowner and were breathing you could qualify for some type of loan.

There were many unscrupulous and/or inexperienced appraisers a.k.a. “Skippy” who helped to hyper inflate the market and cause the turmoil we all have come to know and love today. The market is currently in a re-adjustment stage and many of the Skippies are without work. FHA volume is up and they opened their arms wide to embrace Skippy and keep food on his table when they dropped the test requirement. Now Skippy was enabled to do to FHA what they did in the conventional market.

Thankfully, the light has come on for FHA and they realized that maybe letting anyone and everyone appraise for FHA was not the best of ideas. A bill recently passed by the House (H.R. 3221) under Section 1404 “Revised Standards for FHA Appraisers” requires that appraisers (A) “be certified” and (B) “have demonstrated verifiable education in the appraisal requirements established by the Federal Housing Administration under this subsection.’’

This bill eliminates the open invitation from FHA and now sets standards to those applying. It requires a higher license level in which will help to eliminate many of the inexperienced appraisers who have less education and appraisal experience than required for the higher certified levels. I am not saying that all licensed level appraisers are in this boat. I know and respect many appraisers who are licensed instead of being certified. Many of them made this choice because back in the day it made the most sense based on the home values in the areas they appraised. I also know some certified appraisers who aren’t worth a darn and I wouldn’t trust them to appraise my dog’s house let alone a real house.

The second thing this bill does is require appraisers to take some kind of course on FHA in order to be approved for their roster. FHA appraisals are not difficult if you know what you are doing. FHA requires additional things than a conventional appraisal does not. It makes sense that in order to be approved for FHA you have the proper training and knowledge of FHA’s requirements.

It is my hope that the floodgates did not let in too many Skippies. It appears as if anyone who became approved after 2/7/08 up until this bill goes into effect will remain on the roster regardless of their license level or FHA educational background. FHA can help to save the day if they can keep greedy and unethical people from poisoning the water.

Here is a list of some of the problem areas most often encountered with an FHA appraisal. This list is not meant to be an all-inclusive list, nor is it any guarantee that a property will be approved by FHA if the listed requirements are met. Any deficiencies noted by the appraiser will make the appraisal report subject to those deficiencies being inspected and/or repaired.

· Peeling Paint – if a home is built before 1978, there is a good chance of lead based paint being used in the property once or more in the lifetime of the home. If there are any areas inside or outside of the home with paint blisters or cracked and peeling paint, the affected areas must be corrected in order for the property to be considered by FHA. Common areas are the exterior siding, around door and window frames, porches with painted floors and/or ceilings, garages and other buildings.

· Mechanical Systems – the utilities must be turned on and functioning for a property to be considered by FHA. The appraiser is required to test the systems during the appraisal process. If any of the utilities are not turned on, the appraiser must come back when they are turned on. This will usually result in additional trip fees and a longer delay. The mechanical systems include the electric, plumbing, and heating systems.

· Attic & Crawl Spaces – access to these areas MUST be available. An appraiser is required to have a “head and shoulders” view of these areas. If a property does not have access to any of these areas, an access area must be made and the appraiser must view the area before FHA will consider the property.

· Defective Construction – any property with visible structural issues will be required to be fixed prior to FHA considering the property.

· Roof – the roof of the property must be in a condition that does not affect the safety and/or livability of the inhabitants or the structure of the home itself. Roofs that appear to be worn out or leaking should be fixed if a home is going to be considered by FHA.

· Foundation – properties with cracked masonry and foundations will require an inspection from a licensed professional prior to be considered by FHA. Most homes have some kinds of cracks due to settling and may not necessarily require repair. However it is the appraiser’s job to note these cracks and require an inspection.

· Location - properties that are located in an area that would endanger the physical improvements or affecting the livability of the property, its marketability, or the health and safety of its occupants will be rejected under FHA guidelines. Highest and best use issues for properties located in an area where the land use is changing away from residential may also be rejected by FHA.

· Soil Contamination – appraisers are to check for readily observable evidence of hazardous substances in the soil. This could include unusual pools of liquid, pits, ponds, lagoons, stressed vegetation, stained soils or pavement, drums or odors. If any of these conditions exist, additional testing and/or inspections will be required.

· Grading & Drainage – the house should have adequate drainage leading away from the foundation and should not have standing water pool up in the yard. This will require a repair before being considered by FHA.

· Infestation – any evidence of activity for termites and other wood destroying bugs will require further testing and inspections before being considered by FHA.

Making improvements to your home can be a great way to increase its value. It all depends on the improvement made and the quality of the improvement. Sometimes you recoup more than you've spent; other times you don't. Just because you've spent more money on an improvement than the market will bear, that doesn't mean that improvement has no value. Value in Use can be defined as The value of a property as used for a specific purpose. A homeowner might want a home movie theater in their basement. They might spend $10,000 more than what the market will pay for this improvement. There is still value to the home owners in this improvement as they will use and enjoy this improvement for as long as they own the home. When the homeowners sell their home, it is highly unlikely the cost of the home theater will be added to the sales price. The years of use and enjoyment is where the value of that improvement lies.

Before you start making improvements to your home, here's another thing to consider. The Theory of Substitution states that the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property, assuming that no costly delay is encountered in making the substitution. This means that no buyer is going to knowingly pay more for something when they can get something similar for less. You could install solid gold faucets in your master bathroom. Mr Jones' house down the street is similar to yours in every way except for the faucets. The typical buyer is not going to pay more for your house than Mr. Jones because of the gold faucets. If you over improve your house, that is make improvements that are above and beyond what is normal for the neighborhood, you will not likely see that money returned to you in the sales price on your home.

This may be old news for some people but not everyone is familiar with the changes made by FHA.

Excerpts from MORTGAGEE LETTER 2005-ML-48 This Mortgagee Letter is effective for all appraisals performed on or after January 1, 2006.

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

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

Well (individual water system): test or inspection required if mandated by
state or local jurisdiction; if there is knowledge that well water may be
contaminated; when the water supply relies upon a water purification system
due to presence of contaminants; or when there is evidence of:
    Corrosion of pipes (plumbing)
    Areas of intensive agriculture within 1/4 mile
    Coal mining or gas drilling operations within 1/4 mile
    Dump, junkyard, landfill, factory, gas station, or dry cleaner within 1/4 mile
    Unusually objectionable taste, smell or appearance of well water
(superseding the guidance in Mortgagee Letter 95-34 that requires well
water testing in the absence of local or state regulations)

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

Flat and/or unobservable roof

Examples of conditions that will continue to require automatic inspections include, but are not limited to:

1. Standing water against the foundation and/or excessively damp basements
2. Hazardous materials on the site or within the improvements
3. Faulty or defective mechanical systems (electrical, plumbing, or heating)
4. Evidence of possible structural failure (e.g., settlement or bulging
foundation wall)

This may be old news for some people but not everyone is familiar with the changes made by FHA.

FHA's primary area of concern is in these three areas: Safety, Security, and Soundness. Properties with conditions that threaten or could threaten the health and safety of its occupants or the soundness of the property are still required by FHA to be repaired. MORTGAGEE LETTER 2005-ML-48 (effective as of January 1, 2006) lists these conditions as requiring an automatic repair:

* Inadequate access/egress from bedrooms to exterior of home
* Leaking or worn out roofs (if 3 or more layers of shingles on leaking or
worn out roof, all existing shingles must be removed before re-roofing)
* Evidence of structural problems (such as foundation damage caused by
excessive settlement)
* Defective paint surfaces in homes constructed pre-1978
* Defective exterior paint surfaces in home constructed post-1978 where the
finish is otherwise unprotected.

Effective February 7, 2008, FHA will no longer require the HUD examination on FHA reporting and examination to become eligible to do FHA appraisals. One must be licensed or certified to be placed on the roster. FHA feels that the testing required to become an appraiser is sufficient and that requiring an FHA exam is overkill. What this means is that Skippy doesn't have to bother looking up the answers online for the 10 question long "examination" required to become FHA approved anymore. Not only can Skippy do a sloppy report for the conventional market; he can mess up things in the FHA market too.

FHA already made it too easy to become FHA approved when they decided to drop the dreaded examination and replace it with the questionnaire you fill out online. I've heard horror stories about the old exam and how hard it was to pass if you didn't study and know your stuff. I studied for the exam. I lost sleep thinking about taking it. I finally mustered the courage to take it and FHA replaced it with the 10 question survey. I guess FHA dropped it all together because it was still too hard for Skippy to pass.

For those of you who don't know, Skippy is the poorly trained or unethical appraiser who does sloppy appraisal reports filled with errors, omissions, and/or lies. Skippy is the best friend of crooked loan officers, crooked real estate agents, and crooked property investors. He ALWAYS gets the value needed to make the deal work. He charges a lot LESS than than other appraisers. He is so FAST that the report is completed before he takes his lunch break. He NEVER mentions things that could kill the loan.

Now this doesn't mean that anyone who gets approved for FHA in the future is a Skippy. There are more ethical and honest appraisers out there than there are Skippies. They work hard day in and day out to keep the dirt off their names. I truly believe that in my heart. It's just that the bad appraisers fling mud in our eyes and give all appraisers a bad rap.

The real estate market is in such turmoil right now and everyone involved in it is pointing fingers at each other. It just doesn't seem prudent to relax your standards even more and allow anyone and everyone a spot on the roster without proving first that they belong there. The market is where it is now because of the relaxed standards that are in place. That's why the standards are increasing for many of us in the industry. It's too easy for greedy and fraudulent people to make a ton of money while destroying the lives of the people they are supposed to be helping.

For those of you out there who still care about the Real Estate Industry and are honest, hardworking individuals, I ask that you be careful when choosing a new appraiser. Please don't base your decision solely on how much he charges or how fast he gets you the report. When you decide on trying a new restaurant do you base your decision on how cheap the food costs or do you base it on how good the meal is? I firmly believe that you get what you pay for. Not all appraisers who are faster or cheaper than other appraisers are a Skippy. There are many great appraisers out there who have to be that way to stay competitive with Skippy.

Anyways that's just my two cents worth:

This may be old news for some people but not everyone is familiar with the changes made by FHA.

FHA has made some changes in its requirements for financing a home through their program. Gone are the old VC sheets with the pages of hoops a property must jump through. Gone are the mandatory repairs for cracked window panes, torn screens, and worn flooring. Gone are the days of counting steps to determine if a handrail is required. 

MORTGAGEE LETTER 2005-ML-48 (effective as of January 1, 2006) states: Minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, that do not affect the safety of the occupants or the security and soundness of the property no longer require a repair to bring a property into compliance with FHA Minimum Property Requirements.

Examples of minor property conditions that no longer require automatic repair for existing properties include, but are not limited to:
* Missing handrails
* Cracked or damaged exit doors that are otherwise operable
* Cracked window glass
* Defective paint surfaces in homes constructed post 1978
* Minor plumbing leaks (such as leaky faucets)
* Defective floor finish or covering (worn through the finish, badly soiled carpeting)
* Evidence of previous (non-active) Wood Destroying Insect/Organism damage where there is no evidence of unrepaired structural damage
* Rotten or worn out counter tops
* Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post- 1978
* Poor workmanship
* Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
* Crawl space with debris and trash
* Lack of an all weather driveway surface

FHA still requires certain conditions to be met in order for a property to be eligible. Check back for Part II where I discuss what is still required.

This may be old news for some people but not everyone is familiar with the changes made by FHA.

On January 1, 2006, FHA revised many of their guidelines and requirements. These revisions are contained in the Handbook 4150.2 Revised Appendix D. These changes were made because of the revised 1004 appraisal forms released by Fannie Mae and Freddie Mac. Appraisers were required to use these new forms effective January1, 2006. The reporting requirements in the new forms matched those of FHA in many ways. As a result appraisers are no longer required to use the VC sheets in their reports. FHA also loosened its belt, so to speak, when it came to repairs. No longer are minor cosmetic repairs required. Appraisers are still supposed to report defects, as they should for all appraisals. The FHA Handbook states that:

Cosmetic repairs or examples of deferred maintenance that do not rise to the level of a required repair but must be reported by the appraiser:

• Surface treatments such as worn floor finishes or carpeting
• Beautification or adornment not required for preservation of the property such as holes in window screens or small cracks in windowpanes

Required repairs will be limited to necessary requirements to:

• protect the health and safety of the occupants (Safety)
• protect the security of the property (Security)
• correct physical deficiencies or conditions affecting structural integrity (Soundness)

Look for more details on FHA changes in later posts.