The U.S. Department of Housing and Urban Development (HUD) recently issued a draft Mortgagee Letter on reconsideration of value (ROV) policies in connection with appraisals for FHA insured mortgage loans. The draft Mortgagee Letter follows up on action plan items set forth in the Property Appraisal and Valuation Equity action plan jointly issued by HUD and other federal agencies in March 2022. (Although not released until January 2023, it appears that HUD was planning to issue the draft Mortgagee Letter in 2022 based on calendar year 2022 references in the draft letter.)
Comments on the draft Mortgagee Letter are due by February 2, 2023. Comments may be submitted by completing the Feedback Response Worksheet that can be accessed through the FHA Drafting Table, and then emailing the completed Worksheet to email@example.com.
Addressing the draft Mortgagee Letter, HUD Secretary Marcia Fudge stated that “HUD is committed to making the appraisal process fair nationwide. We must eliminate bias in home valuations so that everyone can equally reap the benefit of wealth – and intergenerational wealth – that come along with homeownership,” and that “[t]his announcement is an important step forward in rooting out appraisal bias in this country.”
HUD explains in the draft Mortgagee Letter that 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, and that ROVs under this existing procedure can be initiated at the request of a prospective borrower. However, HUD also notes that FHA has not previously clarified standards for borrower-initiated requests for review of an appraisal. Therefore, FHA is planning to update the existing ROV standards to add specific guidance, set forth in the draft Mortgagee Letter, to process and document a borrower-initiated review of the appraisal results.
HUD also explains in the draft Mortgagee Letter that existing FHA policy permits FHA lenders to obtain a second appraisal in cases where material deficiencies in the appraisal are documented and the appraiser is unable or unwilling to resolve them. The draft Mortgagee Letter provides that “HUD recognizes that material deficiencies may include instances of illegal bias or discrimination; therefore, the list of examples of material deficiencies in [HUD] Handbook 4000.1 is being expanded to include such occurrences.”
HUD notes that to provide FHA with information on the frequency and outcomes of borrower-initiated ROV requests, FHA Connection is being revised to include mandatory fields in the FHA Connection Insurance Application and home equity conversion mortgage (HECM) Insurance Application screens to collect information on such requests.
The draft Mortgagee Letter would revise existing guidance to provide that an ROV refers to the underwriter’s request for the “[a]ppraiser to review the accuracy and completeness of the [p]roperty information, analysis, or market data” that was relevant on the effective date of the appraisal. The draft Mortgagee Letter also would revise existing guidance to provide that if an ROV is requested, the appraiser’s response must be included in a revised version of the appraisal, which must be uploaded into FHA’s Electronic Appraisal Delivery (EAD) portal and logged in FHA Connection.
Existing guidance also would be revised to add that the underwriter must review all borrower requests for review of appraisal results, and that the underwriter must review the appraisal in accordance with FHA requirements for appraisal review and quality of appraisal. Further, FHA lenders would be required to (1) retain in the case binder the request for review of appraisal results, the results of the review, and the response provided to the borrower, and (2) complete the information regarding the borrower request for review of appraisal results on the FHA insurance application and FHA HECM insurance application screens in FHA Connection.
The draft Mortgagee Letter also would modify existing guidance to address the appraiser’s obligations when a ROV is requested. If an FHA lender’s underwriter requests a ROV, the appraiser would be required to (1) 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 (2) summarize the analysis of all additional information provided by the underwriter within a revised version of the appraisal report.
HUD notes in the draft Mortgagee Letter that to increase consumer awareness of the option to request a review of the results of an appraisal, FHA is adding a disclosure to the Homebuyer’s Copy of form HUD-92800.5B Conditional Commitment Direct Endorsement Statement of Appraised Value.