Recently the Department of Housing and Urban Development released a draft Mortgagee Letter. The proposed letter establishes a process for mortgagees when a borrower requests a review of the appraisal results associated with their application for an FHA-insured mortgage.
On June 1, 2021, President Biden announced the creation of an Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) to combat bias in home appraisals. FHA is committed to strengthening safeguards against unlawful discrimination in residential property valuations and is taking multiple actions to enhance information, process, and documentation requirements with regard to this important issue. This includes issuing guidance to improve the process by which FHA program participants may request a reconsideration of the valuation (ROV) of a property if the initial valuation is lower than expected.
Current FHA guidance allows an underwriter to request an ROV when the Appraiser did not consider information that was relevant on the effective date of the appraisal. ROVs under this existing procedure can be initiated at the request of a prospective borrower. However, FHA has not previously clarified standards for Borrower-initiated requests for review of an appraisal.
Second Appraisal by Original Mortgagee
A second appraisal may only be ordered if the Direct Endorsement (DE) underwriter (underwriter) determines that the first appraisal is materially deficient, and the Appraiser is unable or uncooperative in resolving the deficiency. The Mortgagee must fully document the deficiency and status of the appraisal in the mortgage file. The Mortgagee must pay for the second appraisal. Material deficiencies on appraisals are those deficiencies that have a direct impact on value and marketability. Material deficiencies include, among other items, indications of unlawful bias in the Appraisal or other violations of applicable local, state, or federal fair housing and nondiscrimination laws.
Appraisal Review
The underwriter must review the appraisal and ensure that it is complete, accurate, and provides a credible analysis of the marketability and value of the Property. The underwriter must ensure the appraisal complies with the requirements in Valuation and Reporting Protocols (II.D.4), any additional appraisal requirements that are specific to the subject Property, and all applicable federal, state, and local laws, including the Fair Housing Act and other federal, state, or local antidiscrimination laws. The underwriter must determine if:
- the original appraisal is acceptable without further action,
- the appraisal is materially deficient (see Second Appraisal by Original Mortgagee (II.A.1.a.iii(B)(9)(a)), or
- a Reconsideration of Value (II.A.3.a.viii) is appropriate.
Borrower Requests for Review of Appraisal Results
The Mortgagee’s underwriter must review all Borrower Requests for Review of Appraisal Results. The underwriter must review the appraisal in accordance with the requirements for Appraisal Review and Quality of Appraisal (II.A.3.a.v.).
The Mortgagee must retain the request for review of appraisal results, the results of the review, and the response provided to the Borrower in the case binder. The Mortgagee must complete the Borrower Request for Review of Appraisal Results information on the Insurance Application and HECM Insurance Application screens in FHA Connection (FHAC).
Appraiser Response to Reconsideration of Value Requests
The underwriter may request a ROV from the Appraiser and the Appraiser must:
- review all appropriate property information and market data received from the underwriter that is relevant on the effective date of the appraisal, including additional property sales or listings, and
- summarize the analysis of all additional information provided by the underwriter within a revised version of the appraisal report.
Conclusions
- These are proposed standards for FHA loans.
- No action is required at the present time.
- Every action described above makes sense for all financial institutions to adopt immediately for all mortgage loans.