The U.S. Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), recently issued Mortgagee Letter 2024-07 addressing reconsideration of value (ROV) policies in connection with appraisals for FHA insured mortgage loans under the Title II forward mortgage loan and reverse mortgage loan programs. The amended Mortgagee Letter may be implemented immediately but must be implemented for FHA case numbers assigned on or after September 2, 2024. With implementation of the Mortgagee Letter, HUD requires lenders to allow borrowers to request a re-assessment of the appraised value of their property if they believe there is an issue (including bias or discrimination) with the initial valuation. The 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.

As outlined by HUD, the new policy includes:

  • “A requirement that underwriters be trained to identify and remedy appraisal deficiencies, including racial and ethnic bias;
  • Requirements for lenders when receiving, processing, and communicating the status of the reconsideration of value requests initiated by a borrower;
  • Standards for lender quality control of appraisal reviews and reconsiderations of value; and
  • Standards for appraisers to respond to requests from lenders for a reconsideration of value review.”
  • Adding to what constitutes a material deficiency in an appraisal deficiencies “that indicate a potential violation of fair housing laws or professional standards related to nondiscrimination.” The policy also specifies that such deficiencies include “statements related to characteristics of a protected class unless fair housing laws permit consideration of the characteristic, such as age-restricted housing or housing with certain accessibility features.”
  • Authorization for an underwriter to obtain a second appraisal without communicating with the appraiser conducting the initial appraisal when “the underwriter considers the Appraiser unable to resolve material deficiencies due to the nature of the deficiency.”

With regard to a borrower-initiated ROV, the Mortgagee Letter provides that a lender “must establish an appeal process that includes steps for the Borrower to receive a copy of the appraisal report and request an ROV when the Borrower believes the appraisal report is inaccurate or deficient.” The Equal Credit Opportunity Act and Regulation B currently require a mortgage lender to provide the applicant with a copy of any appraisal or other written valuations for loans to be secured by first liens on a dwelling, and the Truth in Lending Act and Regulation Z require mortgage lenders to provide an applicant with a copy of any written appraisal performed in connection with a higher-priced mortgage loan.

On the same day that HUD issued the Mortgagee Letter, FHFA announced that, with its assistance, Fannie Mae and Freddie Mac (the Enterprises) published new ROV policies, that are meant to provide clear requirements for lenders to disclose and outline the ROV process for consumers, standardize communication to appraisers, and establish ROV response expectations. “Consistent standards for lenders and appraisers, coupled with a well-understood process for consumers to challenge appraisal findings, will help ensure that consumers are treated fairly,” said FHFA Director Sandra L. Thompson. The guidance may be implemented immediately and must be implemented for loan with applications dated on or after August 29, 2024.

Consistent with the standards outlined in the amended Mortgagee Letter, Fannie Mae published an update to its Selling Guide, and Freddie Mac published a bulletin on selling standards to address new ROV policies.

Fannie Mae’s guide outlines steps for borrowers, and provides that a borrower initiated ROV request must include: the borrower’s name, property address, effective date of the appraisal, appraiser name, date of the ROV request, and a description of unsupported, inaccurate, or deficient areas in the appraisal report. The borrower’s request should also include additional data, information, and comparable properties (not to exceed five), the related data sources (for example, the MLS listing number), and an explanation of why the new data supports the ROV. The Fannie Mae guide also outlines steps for lenders, in addition to the requirement for lenders to implement written policies for accepting and processing a borrower initiated ROV request. A lender must conduct its own appraisal review and designate an appraiser expert to review the ROV request. To complete the ROV process, a lender must validate the request from the borrower, ensure all necessary information has been collected from the borrower, align its procedures with the Appraiser Independence Requirements, send standardized communications to the appraiser that contain all relevant information about the property and the reason for the ROV, and ensure all documentation and communication related to the appraisal and ROV are retained in the loan file. Lenders are instructed to contact the local appraiser licensing agency if there is evidence of any unacceptable appraiser practice, and contact the proper local and federal agencies if there is suspected overt discrimination.

Freddie Mac’s bulletin includes much of the same guidance, and similarly requires lenders to implement procedures that include steps for borrowers to request a ROV and steps for lender review and resolution. As outlined in the Fannie Mae guidance, lenders are instructed by Freddie Mac to disclose the ROV process to borrowers with instructions for initiating a request, and use standardized communications with appraisers, including instructions for the appraiser to deliver a revised appraisal after a ROV request. Further, as is the case with the Fannie Mae guidance, lenders are instructed to contact the local appraiser licensing agency if there is evidence of any unacceptable appraiser practice, and contact the proper local and federal agencies if there is suspected overt discrimination.