A coalition of mortgage and banking industry trade groups called on the Department of Housing and Urban Development to align the Federal Housing Administration's collateral valuation practices with those at the government-sponsored enterprises.
HUD issued a
The joint response from 11 trade groups included the Mortgage Bankers Association, the Community Home Lenders of America, the National Association of Mortgage Brokers and the Broker Action Coalition from the lending side.
Banking groups included the American Bankers Association, the Independent Community Bankers of America, America's Credit Unions and the Defense Credit Union Council.
The Housing Policy Council, the Collateral Risk Network and the National Association of Realtors were also signatories.
Rules hinder access to FHA products, groups claim
The letter argues the current requirements hinder access to FHA, calling them a significant impediment for borrowers wanting to go this route. In June, HUD announced what it
"The standards impose an additional set of requirements that do not reduce the lenders' collateral risk or, in most cases, improve the overall soundness of the property," the groups' said in their letter.
"Additionally, the current process enlists appraisers into a quasi-property inspector role, often certifying property conditions outside of their expertise and role, which is to identify readily observable, material conditions that may affect the safety, soundness, structural integrity, security, marketability, or value of a property."
The role of UAD 3.6 in the proposed changes
The letter notes the GSE standard quality ratings which categorize property conditions, have been further refined for the Uniform Appraisal Dataset 3.6 update, whose use for
FHA is set to do a soft launch of UAD 3.6 on the same day, the letter said.
By FHA using the GSE methodology, it will protect those borrowers from purchasing substandard housing while aligning key elements of the appraisal process, the groups state.
"We envision a policy framework that distinguishes between property conditions that must be repaired prior to closing versus those that may be appropriately addressed through post-closing repair escrows or holdbacks as well as property conditions that are cosmetic or non-material versus those that require evaluation by a qualified specialist," the letter said.
UWM supports preserving the current model but modernized
At least two lenders took the opportunity to respond: United Wholesale Mortgage and Newrez.
The nation's largest originator, UWM in its letter said the company "supports preserving the current FHA appraisal-based hybrid," because the program "serves a distinct statutory and policy function" than the GSEs.
This provides "meaningful protection" for FHA borrowers and its Mutual Mortgage Insurance Fund.
"The case for modernization is for FHA to retain its distinct approach with better tailoring, focusing on conditions that present material risk rather than those that are merely cosmetic," UWM said.
It called on FHA to adopt a tiered repair taxonomy that is risk-based. UWM wants "a clear, consistently applied method for determining whether a condition requires mandatory repair, may be deferred to post-closing, or is merely informational."
In his "3 Points with Mat Ishbia" video put out on July 1, the UWM chairman, president and CEO said the fact
Meanwhile, Newrez' response said under the current FHA rules, the reduction of collateral risk is "marginal" versus the GSE valuation requirements.
"The additional requirements hinder some files from moving forward because the repairs cost more than a GSE loan," Newrez said. "If a purchase, there are additional issues when repairs are needed of who will complete them and will the seller allow prior to closing.
Its response also included a laundry list of items for HUD to consider removing from the requirements.
Reverse mortgage lenders want flexibility
The National Reverse Mortgage Lenders Association filed its own response. Among the changes it would like to see would be for repairs and inspections for Home Equity Conversion Mortgage borrowers, proposing an alternative framework which allows direct endorsement underwriters to clear any "subject to" appraisal conditions through a review.
"HUD should permit the same flexible types of evidence that were successfully utilized during the COVID-19 pandemic," NRMLA said. "Specifically, the verification packet should consist of a letter signed by the borrower affirming that the work has been completed, supplemented by additional documentation as applicable."
NRMLA took the opportunity to comment on modernizing collateral risk assessment, even though it was not specifically included in the RFI. The current requirement is for a full second appraisal as a result of this process.
The group called on HUD to move to a "tiered, technology-driven framework," which uses different types of valuation methods based on the risk elements versus the current one-size-fits-all approach.
Education is what's needed, consumer advocates and appraisers say
The Consumer Federation of America said while the rules make sure people are buying homes which offer sustainable homeownership while reducing the risk of major, unforeseen repairs shortly after the purchase, they also create "unnecessary barriers" for getting an FHA mortgage.
"Among home sellers and real estate agents, the perception often persists that FHA-financed transactions are unusually burdensome, likely require extensive repairs, and are prone to delayed or even failed closings compared to conventional financing," CFA said.
To resolve the myths and misunderstandings, FHA should prioritize both consumer education and real estate and mortgage industry education and improve communication on "the exact nature" of the minimum property requirements.
Among its suggestions was to allow certain minor deficiencies to be fixed post-closing.
Appraisal groups say they support the FHA effort to modernize property requirements, but like the CFA, claim the problems with compliance are not from the standards itself, "but from ambiguity in how certain requirements are interpreted and applied."
The letter was submitted by the Appraisal Institute, with other signatories being the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers and the Massachusetts Board of Real Estate Appraisers.
"FHA's recent efforts to streamline documentation requirements and clarify observation protocols demonstrate that meaningful burden reduction can be achieved while preserving the underlying safety, soundness, and security objectives of the program," the letter said.
The current approach provides a defined baseline standard, which the groups said is more transparent than the "principles-based condition standards used in some conventional lending programs."
