Big Changes Coming for FHA Program Including Adopting HVCC
Posted Sep 19, 2009 @ 8:27 pm, Viewed by 810 Visitors, Read 933 Times.Yesterday, The Federal Housing Administration (FHA) announced several significant policy changes that are intended to help improve their increasing exposure to risk. Seems that rising defaults have hit the FHA's reserve funds hard; in fact, according to the Mortgage Bankers Association, 7.8% of FHA's loans were 90 days or more late or already in foreclosure at the end of the second quarter. While that's equal to the national average for other loan programs, it's up from 5.4% a year ago for FHA. In addition, the increased mortgage-based losses have pushed the agency to the point it is in danger of having its reserves fall below the 2% threshold mandated by Congress. Some officials believe it could happen before the end of this month. Options for the agency to correct the situation are limited and could include getting taxpayer funds to top off its reserves or increasing the premiums borrowers pay for insurance from the agency.
And as is usual with any government run agency, knee jerk reactions also become the norm when things don't go as planned. To that end, FHA released the following changes that will become effective January 1, 2010:
- Adoption of the Home Valuation Code of Conduct Guidelines (HVCC)
- Updated Appraisal Validity Period
- New Appraisal Portability Regulations
- Modification of Procedures for Streamline Refinance Transactions
- New Requirements for Lenders to Submit Audited Financial Statements for Review
- Adjustments to the Approval Process for Participation in FHA Loan Origination (Proposed)
- Increased Net-Worth Requirements for Lenders (Proposed)
I won't bore you with a description of most of the changes as they are specific to lenders, but the appraisal guideline changes will have a major impact on things just like they did with Fannie Mae and Freddie Mac loans. FHA will not require the use of Appraisla Management Company's (AMC's) or other third party organizations for appraisal ordering, however, if lenders do use AMC's and/or other third party organizations FHA lenders must ensure that:
- FHA Appraisers are not prohibited by the lender, AMC or other third party, from recording the fee the appraiser was paid for the performance of the appraisal in the appraisal report.
- FHA Roster appraisers are compensated at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. The fee for the actual completion of an FHA appraisal may not include a fee for management of the appraisal process or any activity other than the performance of the appraisal itself.
- Any management fees charged by an AMC or other third party must be for actual services related to ordering, processing or reviewing the appraisals performed for FHA financing.
- AMC and other third party fees must not exceed what is customary and reasonable for such services provided in the market area of the property being appraised.
Other major appraisal guideline changes include:
- In cases where a borrower has switched lenders during their loan process - new FHA guidelines will now allow/require a second appraisal if - the first lender fails to provide a copy of the appraisal to the second lender in a timely manner such that it would cause potential harm to the borrower including a delayed closing, loss of interest rate lock, purchase contract deadline, foreclosure proceedings, or late fees; the first appraisal contains material deficiencies as determined by the Direct Endorsement underwriter for the second lender or the appraiser performing the first appraisal is on the second lender's exclusionary list of appraisers.
- FHA also reduced the length of time that an appraisal could be considered valid for collateral underwriting. Previously, FHA considered an appraisal written within the last six months to be an acceptable property valuation. The new guideline limits the time period to 4 months.
Naturally, some of the other standards of HVCC will also apply to FHA loans including limitations on who can order and have contact with the appraiser and the requirement that the appraiser must have knowledge/experience in the area which they have been hired to perform the appraisal.
What kills us most about this whole situation is some of the comments government officials (and others) have given as to the reasoning why FHA is adopting these measures. It seems that they believe the rise in FHA loan originations has been directly caused by lenders pushing the government program just so they can bypass HVCC and have influence over the appraisal process. If this is the case, then why hasen't the govermnet enforced the laws of the land and put scores of these lenders in jail? I mean c'mon folks; it should be easy for the government regulators to find all these shady lenders who use FHA loans just so they can inflate property valuations. It ought to be a no brainer.
God forbid they might consider the real reasons may have something to do with a 3.5% down payment requirement, more lenient credit standards, or the fact that deficient medical related credit/judgments and previous foreclosure history guidelines are treated differently by FHA versus a conforming Fannie/Freddie loan. But no, that would be too obvious wouldn't it? It just has to be because of some nefarious activities by all these unscrupulous lenders.
And so the beat goes on in the mortgage lending industry.
Update: Here's another great new change to FHA lending guidelines - New FHA Rule Regarding Condominium Financing
Metro Mortgage Company is a federally regulated Mortgage Banker specializing in residential Florida home loans including Conventional, Jumbo and FHA/VA mortgages. Visit our home loan approval process page for more information or call us today at 888-617-3674.
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Groups meet with Federal Regulators to try and reform appraisal process...read more
Let's try this again.
http://www.floridarealtors.org/NewsAndEvents/article.cfm?id=223788
I decided to add this information to the blog post based on the comment received above.
I want to clarify right up front that the purchase transaction example I'm using was in no way affected by its appraisal. The buyer was putting down over 45% on the purchase, so the loan proceeded accordingly in spite of the shortage in value versus the purchase price.
The home was a 3/3/2 with 2600 sq ft of living space, pool/screened lanai and most importantly, a dock and boat lift for up to a 30 foot boat with unrestricted deep water direct access to the Gulf of Mexico within a 10 minute boat ride of its location.
The purchase price was $575K. The appraised value was $522K.
The AMC was one of the largest and most well known in the country and the appraiser was actually from the city where the home is located. In addition, the appraisal was supposedly "reviewed" by an AMC in-house review appraiser.
Here are just a few examples of the "things" we received in the report:
There were 13 comparable sales in subject area from $200K to $800K; 10 were normal resales, 2 were short sales and 1 was a foreclosure; 7 had deep water gulf access.
The three comps chosen by the appraiser were one normal resale, one short sale and one foreclosure. (Note: this ties directly to what was discussed with the Federal Regulators referenced in the link in my previous comment).
Two of the comps had no "unrestricted deep water direct access to the gulf". One had a canoe dock (no lift) with access to a small creek that you can barely get the canoe down at high tide and the other had a dock/lift, but again was located on a waterway that you "cannot" get a boat of any size down (especially not a 30 footer) at any time no matter what the level of the tides.
One comp was not adjusted for one less bedroom and another comp was not adjusted for a 3 car garage.
A resale listing (within the same subdivision, just down the street) used as an additional comp to support value had smaller square footage and fewer rooms and was given a value (after adjustments) of $105K more than the subject property. There was no explanation or comments given as to why it had this additional value.
According to the appraisal, there were "over" 40 comparable listings currently available on the market that could be used as supporting comps - 30+ of which were normal resales (many of which also had unrestricted deep water direct access to the gulf) and 10+ which were short sales or foreclosures.
Both the buyer and seller names were wrong on the report.
The community was shown as still being under construction (including its amenities). It was actually fully completed in 2002.
Subject shown as being on well and septic although it is actually is on city sewer/water.
Since the value did not affect the transaction, the buyer did not contest the appraisal; however, all the mistakes had to be addressed to make the loan saleable in the secondary mortgage market. That process took over a week of back and forth to correct. The excuses were too many to post, but I'm sure you can all imagine what we had to go through and what explanations were offered by the AMC for the mistakes.
This is just another perfect example of what is wrong with the current housing industry in general. And, believe me when I say this, I'm not trying to complain solely about appraisers. It's with everyone involved who just can't seem to "do their job in a professional manner," be they agents, lenders, appraisers, inspectors, title closers or whomever.
Until the governing licensing agencies and organizations (and especially members) involved in overseeing the industry take seriously the competency of those involved within it, the industry as a whole will continue to suffer greatly.
@Brian
If you have been living in the "wild west" as you say, why did you not report any abusive behavior to the proper governing authority (or even the Appraisal Institute for their help) immediately? Seems to me you have no one to blame but yourself for your problems with the lenders in question.
Roger
The new 4 month appraisal will help for increasing areas though!
Brian Coester
There is never going to be a perfect solution that cures all of the problems and no matter what there will be the occasional problem with appraisals, appraisers and appraisal reports, HVCC or not.
The issue is how do we at least get some confidence the appraiser wasnt influnced to push the value or miss things to please the client?
Not for one spot deal, but for 10,000 a day. This standard needs to be accepted nationally and by everyone as the essentially "the rule" for the appraisal ordering process and appraisal conduct.
The HVCC is not perfect but I really dont see a better option, any suggestions?
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Gulf Coast Associates is a private real estate firm specializing in SW Florida Real Estate. Benjamin Dona is the Broker-Owner. He and his wife Terry, an underwriter with 20 years experience, also own a federally-regulated mortgage banking firm, Metro Mortgage Company.
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FHA adopting the HVCC was a must. The appraisal is the only thing the lender has to evaluate the property and the most accurate appraisal possible should be the goal of the lender, broker and apprasier. The appraisal business has been the wild west for the past 5 years and things are finally getting on track.
Brian Coester