After months of public criticism, the Clinton administration has unveiled a series of reforms aimed at protecting home buyers using the federal government's largest mortgage financing program. Whether they'll actually help home buyers, however, is still an open question.
The changes primarily affect appraisals and inspections for Federal Housing Administration loans, a mortgage resource used by about 800,000 first-time and moderate-income buyers a year.
Under the reforms, appraisers who intentionally ignore serious property defects in homes insured by FHA will face debarment, heavy fines and even criminal prosecution.
FHA appraisers will also be required to report all property defects to home loan applicants and to recommend professional inspections of the property whenever they find noteworthy problems. The cost of the inspections--up to $300--will be eligible for inclusion in the mortgage amount insured by FHA.
The reforms, outlined by Housing and Urban Development Secretary Andrew Cuomo, represent the government's response to complaints by FHA home buyers, consumer groups and appraisers about widespread conflicts of interest and fraud in the appraisal and inspection process.
The problems were documented in this column last fall and winter and became the focus of an investigation this spring by the General Accounting Office, the congressional audit agency.
FHA home buyers in several states complained that appraisers ignored serious defects in their properties, leaving them with unsafe and sometimes uninhabitable houses after closing.
The GAO investigation, completed in May, described FHA-insured homes with severe masonry and foundation damage, temporary jacks holding up floors, rotted roofs and siding, extensive termite damage and various other safety and code violations. None of the problems had been noted by appraisers valuing the homes for FHA.
Appraisers charged that the key to the problem was the FHA's own rules--changed just three years ago--that allow mortgage lenders to pick virtually anybody they want to perform property valuations.
Given that freedom, critics charged, FHA lenders increasingly steer the business to "see-no-evil" appraisers who will deliver the valuation numbers needed to speed the loan to closing.
Under the procedures used by the FHA before 1995, lenders had no such control. Appraisers were assigned by the FHA on a rotating basis from local "panels" of FHA-trained private appraisers.
Two dozen former FHA panel appraisers from around the country interviewed last fall said that under the current rules, appraisers who don't cooperate with lenders don't get many FHA assignments.
An appraiser in Kansas City, Mo., Jack Shelton, said it's an open secret that "if you want [FHA business] you can't cause trouble" for the lender who chooses you. Another appraiser, Edward L. Leppert of Columbus, Ohio, charged that FHA lenders frequently sound out appraisers on values before agreeing to hire them.
"If you can't provide their number," said Leppert, "you don't get the [job]."
The new FHA rules are intended to increase the penalties on appraisers who overvalue homes for whatever reason and who ignore obvious property defects.
Rule changes announced earlier this year emphasized that lenders may be disciplined or cut off from lucrative FHA insurance if they hire appraisers who miss defects and deliver inflated valuations to meet sales contract prices.
Under the revised procedures, appraisers will receive new guidelines on how to identify and report physical problems with houses and will be instructed to give special attention to such "health and safety" features as electrical systems, heating, water supply and plumbing.
For the first time, false statements on FHA appraisals will be treated as violations of the False Claims Act, which prohibits false statements to federal agencies. Civil penalties under the act range from $5,000 to $10,000 per false statement, plus triple compensation for damages suffered by the government.
Lesser penalties--such as suspension from FHA work for a year--will apply when an appraiser fails to report property defects costing $5,000 or more for repairs or ignores defects endangering the health or safety of occupants of a home.
Cuomo announced that the agency plans to ferret out shoddy appraisals by hiring independent contractors who will examine the accuracy of 10% of the 800,000 FHA appraisals conducted each year.
Despite the new reforms, some appraisers and consumer groups aren't convinced they'll root out the fraud and conflict of interest that have been documented as being pervasive in the FHA program. Columbus appraiser Leppert said the tougher penalties "won't do a thing as long as lenders continue to be able to choose their friends" and avoid scrupulously honest, tough appraisers.
The real test for the reforms, however, will come in the next year or two:
Will the FHA be able to demonstrate that it rigorously enforced its tough-sounding new rules? Or will first-time home buyers still be moving into FHA homes with bad wiring, bad plumbing, bad roofs and bad appraisals that inflate prices?
Distributed by the Washington Post Writers Group.