Much has been written recently about the new Federal Housing Administration Single Family Housing Policy Handbook (Handbook 4000.1), including some misinformation. Here’s what valuation professionals should know about the revisions.
The Appraisal Institute last week wrote to FHA highlighting a comprehensive review by the Appraisal Institute comparing it with the previous Handbook. This review uncovered new protocols; however, there also are instances of much-needed clarification of issues and concerns that FHA appraisers have expressed for many years.
The language found in the new 4000.1 Handbook now emphasizes the phrase “readily observable conditions” when defining the inspection protocols for a FHA Roster appraiser. The former Handbook emphasized a “complete visual inspection” of the property, which is the exact language found in the scope of work and the appraiser’s certification preprinted on the Fannie Mae/Freddie Mac appraisal report form used by all residential lending appraisers. Technically, all lending assignments require a complete visual inspection of the interior and exterior of the appraised property. The critical difference in the new 4000.1 Handbook is FHA’s emphasis that an appraiser’s observation is limited to readily observable conditions. In fact, the phrase “complete visual inspection” is not found in the new 4000.1 Handbook. This distinction between the old “complete visual inspection” and the new “readily observable conditions” has been well received by students in AI’s education offerings.
The role of inspections in the process has been a point of confusion. The observation practices required by FHA generally exceed those of Fannie Mae, such as the directive to operate certain mechanical equipment. However, valuation observations are an essential component to understanding how a house works and evaluating any material impacts on value.
Today, the appraiser’s role has only a minimal inspection component and Handbook 4000.1 provides further confirmation of this trend by stressing that an appraiser’s observation is focused on readily observable conditions. The bottom line is that what is observed by the appraiser during a typical FHA-compliant appraisal inspection of the property simply must be analyzed and reported to the client.
Attic access is a related area of concern. Under Handbook 4000.1, the appraiser must observe the interiors of all attic spaces. The appraiser is not required to disturb insulation, move personal items, furniture, equipment or debris that obstructs access or visibility.
Still, AI suggested that FHA provide additional clarification relating to the operation of appliances and attic and crawl space observations, which are outlined in the letter.
Of more long term importance are process and procedural issues that AI brought to light to FHA relating to appraiser and lender interactions. This includes the refusal of some Direct Endorsement lenders to make decisions relating to Minimum Property Conditions and pushing the decision back on the appraiser, contrary to FHA policy. Some lenders also are refusing to provide points of contact for the appraiser, which is also required under FHA policy. AI also alerted FHA to inconsistent messaging by HUD Homeownership Centers, where Handbook interpretations reportedly differ.
Finally, AI encouraged FHA to re-examine its qualification criteria to conform with congressionally-mandated requirements that FHA appraisers demonstrate verifiable education on FHA appraisal requirements, which FHA contends equates to general qualifying education for certification.
The Appraisal Institute has urged FHA to challenge its lenders, reviewers and appraisers to familiarize themselves with FHA appraisal requirements through programs like the Appraisal Institute’s FHA Appraising for Valuation Professionals seminar. Clearly, this is an issue where education can solve many perceived problems and improve the performance of this important program.