Appraisers say new FHA policy goes too far - by Jim Morrison

Jim Morrison, The Warren Group

Appraisers say new Federal Housing Administration (FHA) policy requires them to work outside their expertise and assess structural and mechanical systems, causing more confusion among the general public and exposing them to increased liability. The FHA’s Single-Family Housing Policy Handbook, which applies to all FHA appraisals completed after Sept. 14, 2015, requires appraisers to report “if the roof has less than two years of remaining life” and “examine the heating system to determine if it is adequate for healthful and comfortable living conditions.”

According to FHA’s 2015 first-quarter market share report, the administration insured 16.5% of the purchase loans nationwide, and 5.7% of the refinancing market in 2014. That’s more than 750,000 borrowers and $133 billion worth of mortgages.

Paul Morgan of JP Morgan and Co. in Wakefield has been appraising homes in Mass. for 22 years and said he thinks the requirements are unfair. “Appraisers are not trained home inspectors,” Morgan said. “Our profession is the science of valuation. We’re not HVAC specialists or roofing specialists.” In fact, the Massachusetts standards of practice for home inspectors do not require them to estimate when a roof will fail or whether or not a heating system is adequate for healthful and comfortable living conditions. The American Society of Home Inspectors standards of practice don’t require that either. Morgan said asking appraisers to report on the distance between a well and a septic system, as the new regulations do, is unrealistic, given that both are buried deep underground. He said he disclaims expertise in structural and mechanical systems in every report.

“We would be creating a misleading appraisal report by representing we have certain knowledge regarding the electrical, heating, plumbing systems or structural integrity, when we don’t,” Morgan said. “We can’t misrepresent any aspect of the report.” Morgan also said his firm raised their fees to reflect the additional work and liability brought on by the new language in the FHA policy.

A spokesman for the FHA said the new policy is more of a consolidation of multiple documents and that the “appraisal requirements are largely unchanged.” The agency said it has not seen a decrease in the number of approved appraisers and doesn’t expect to, since the changes in the policy, as it relates to appraisals, were not dramatic.

Brian Trotier is the executive VP and COO of the Foundation for Real Estate Appraisers and the Associations Liability Insurance Agency Inc. He said he understands that the FHA just wants to make sure marginal borrowers aren’t confronted with major, unanticipated repairs that could result in them defaulting on their loans. “They want the right information for the right reasons, but they’re going about it in the wrong way,” Trotier said. “I fear appraisers will eventually be criticized or sued for something they say about the condition of a property by a lender or borrower.” Trotier said the new language in the FHA policy requires appraisers to make assessments of components of which they don’t have the background – or insurance coverage. “A claim could come in and I could see an insurance company not cover it if it has nothing to do with an appraisal,” Trotier said. “And if claims happen, then rates will undoubtedly go up. These are not the kinds of events the underwriter contemplated when they wrote these policies. They insure against the value of the property, not the condition of the property.”

Jonathan Braverman, of Baker, Braverman and Barbadoro PC, has been litigating real estate cases for 35 years. He said for most appraisers, complying with the new policy is “going to be extremely daunting.” “I think appraisers are going to have to look at this and consider whether they can disclaim competency and liability in any of these specific areas,” Braverman said. “I believe appraisers are going to have to rethink what they’re willing to sign off on, how much they charge and what liability arises out of it.”

Jim Morrison is the residential real estate reporter for Banker & Tradesman, published by The Warren Group, Boston.