What Happened?
Continuing its focus on appraisal bias, the U.S. Department of Housing and Urban Development (“HUD”) issued new guidance to Federal Housing Administration (“FHA”) mortgagees regarding appraisal reviews and reconsiderations of value (“ROVs”). On May 1, HUD issued Mortgagee Letter 2024-07 (the “Letter”), announcing updates to the FHA Single Family Housing Policy Handbook (Handbook 4000.1), finalizing a proposal that outlines when a borrower may request an ROV and how the lender must respond. The Mortgagee Letter includes substantially identical provisions applicable to FHA-insured forward and HECM (reverse) mortgage loans.
Why Is It Important?
Combatting appraisal bias has been a federal government priority since the 2021 announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”). As part of the PAVE efforts (as we previously reported), HUD published a draft version of the Letter (Borrower Request for Review of Appraisal Results) for public comment. In the proposal, HUD sought comment on (among other issues) when material deficiencies in the appraisal process may merit a second appraisal and/or permit a borrower to request an ROV. The Mortgagee Letter finalizes that proposed guidance, incorporating feedback received.
First, HUD has amended the criteria for determining whether a deficiency in an appraisal is “material.” In addition to having “a direct impact on value and marketability,” a material deficiency may be one that “indicates a potential violation of fair housing laws or professional standards related to nondiscrimination” (such as the USPAP Ethics Rule). As an example of such deficiency, the amended Handbook will include “statements related to characteristics of a protected class,” unless the consideration is permitted by fair housing laws.
Second, HUD has clarified that when the nature of a material deficiency is such that the appraiser cannot resolve it, the underwriter may forgo communication with the appraiser before ordering a second appraisal. If a mortgagee orders a second appraisal because of material deficiencies, it must report the deficient appraisal to the relevant state regulator (the appraisal board or equivalent).
Third, HUD has updated its requirements for appraisal review as they relate to the criteria for determining the acceptability of a property. As in its proposed version, the Letter requires a mortgagee to ensure that its underwriters “review the appraisal and determine that it is complete, accurate, and provides a credible analysis of the marketability and value of the Property.” The mortgagee must also ensure that as part of such review, the underwriter is able to identify appraisal deficiencies, including discriminatory practices. The underwriter must remediate such deficiencies by: (a) requesting that the appraiser provide a correction, explanation, or substantiation (as appropriate); (b) requesting an ROV; and/or (c) ordering a second appraisal.
Fourth, HUD has added ROV requirements to its general property acceptability criteria. When communicating with an appraiser regarding an ROV, the Letter requires the underwriter to: (a) include a description of the areas in the appraisal report and the additional information that require a response from the appraiser; (b) provide, as available, detailed information, data, or relevant comparables; (c) only include comparables that are relevant as of the appraisal’s effective date; and (d) include a maximum of five alternate comparables. The appraiser must include his or her response in a revised version of the appraisal, and the mortgagee may not charge the borrower for costs associated with the ROV process.
Further, the Letter requires each mortgagee to establish a process for a borrower-initiated ROV request (which an underwriter must assess for applicability, and relevance and appropriateness of information, before communicating to the appraiser). The Letter requires a mortgagee’s process for borrower-initiated ROVs to include: (a) the provision of a disclosure regarding the process, both at application and upon delivery of the appraisal report to the borrower; (b) specification in such disclosure of the process for submitting an ROV request, including any requirements for or limitations on supporting information; and (c) the establishment of protocols for communication with the borrower regarding the request throughout the ROV process.
Finally, the Letter requires a mortgagee to include in its Quality Control Plan standards for both the appraisal review and the ROV process.
What Do I Need to Do?
Mortgagees of FHA-insured loans have until September 2 to implement the Letter’s requirements (for FHA case numbers assigned on or after that date). However, given that early adoption is permitted, lenders should review the new requirements against their current practices to ensure these requirements are appropriately incorporated into a mortgagee’s policies and procedures and its vendor management oversight program (to the extent the mortgagee utilizes appraisal management companies).
