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Lenders need to be aware of policy & procedural changes are being implemented by HUD/FHA on March 14, 2016.
One of these changes involves a requirement to obtain a new appraisal when processing an FHA loan transaction on a HUD Real Estate Owned (REO) property.
Under current guidelines, which have been in effect for many years, an “AS-IS” appraisal of an REO property was obtained by HUD [or in more recent years by HUD’s designated Marketing & Management (M&M) Company] which was used to help determine the Listing Price and could also be used in underwriting any new FHA loan transaction. HUD would only allow a lender to obtain a new appraisal on an REO property when the REO appraisal had expired or had material deficiencies that had to be documented by the lender.
The problem was that many of these REO appraisals did have deficiencies with respect to comp selection and analysis as well as property condition concerns. Since the lender underwriting the new loan transaction was still expected to review the REO appraisal that was provided to them, there were many instances in which the underwriter had serious concerns with the quality of the appraisal that could not be resolved and had to order a new appraisal. In such cases, many of the parties involved were not pleased that a second appraisal had to be obtained.
Effective on and after March 14, 2016, for FHA transactions that obtain their Case Number Assignment, HUD will now require that a new appraisal is prepared for ALL transactions involving the purchase of a HUD Owned property. In this regard, Appraisers receiving such assignments are being instructed to complete the appraisal report “AS-IS” if they determine that the property meets HUD’s Minimum Property Requirements (MPRs).
If the appraiser determines that repairs are needed in order to meet the MPRs – an estimated “Cost-to-Cure” must be provided and the appraisal report must be completed “Subject to the following repairs or alterations on the basis of the hypothetical condition that the repairs or alterations have been completed”.
Loading ...Although this policy change may increase the overall costs of originating a new loan transaction on an REO property (due to the cost of a second appraisal), underwriters will have a greater comfort level in reviewing appraisals obtained from their AMC or via their internal selection process and in discussing any concerns with the appraiser.
As a result, I believe that this is a step in the right direction by HUD and will help improve the quality of underwriting on transactions involving REO sales.
However – beware the Ides of March as this new policy will likely already be effective!
