HUD will now allow homebuyers to finance up to $300 in home inspection costs through FHA mortgages
WASHINGTON - Housing and Urban Development Secretary Andrew Cuomo today unveiled HUD's
Homebuyer Protection Plan, a package of far-reaching reforms that will benefit 800,000 families who get Federal Housing Administration mortgages each year by dramatically reinventing FHA's home appraisal process.
"We are offering FHA homebuyers the best protection against bad appraisals ever available in the public or private sector," Cuomo said. "The new appraisal system we are establishing creates a new level of consumer confidence in the homebuying process. It answers the two biggest questions facing most homebuyers: 'Is the house I want to buy worth the sale price? Is the house in good condition?' ''
"The vast majority of FHA appraisals are accurate and have no problems," Cuomo said. "A bad appraisal can turn the American Dream of homeownership into a nightmare by overvaluing a home and by overlooking problems that can cost homebuyers thousands of dollars to repair. Too often, this financial disaster forces hard-working families to default on their mortgages and lose their homes. HUD's Homebuyer Protection Plan will prevent many families from experiencing this tragedy. We will improve the appraisal process to make it more accurate and to provide more information about possible problems with homes up for sale. This is one of the most important consumer protection measures in years."
The Homebuyer Protection plan that HUD is implementing to cover all homes purchased with FHA-insured mortgages will: 1) Require a more thorough basic survey of the physical condition of the home to uncover potential problems in a home. 2) For the first time require that home defects found by appraisers be disclosed to potential buyers. 3) Impose stricter accountability on all appraisers and tougher sanctions on those who act improperly - ranging from barring them from doing more FHA appraisals to steep fines and potential prison sentences in the most extreme cases. 4) Require an appraiser to recommend a full inspection of a home if the appraiser finds a significant problem. 5) Allow HUD funds to be used for home inspections. 6) Increase homeownership counseling to help families buy and keep their homes. 7) Speed up the FHA mortgage application review process to give homeowners faster approval of FHA-insured loans. 8) Benefit homebuyers by holding down the cost of FHA premiums to the level reached last year after four reductions under the Clinton Administration. 9) Work to keep buyers in their homes by developing a system to identify those in danger of defaulting on their mortgages, so they can be helped with credit counseling and other assistance.
FHA appraisals, which are designed to determine the value of a home, include a limited review of possible physical problems in the home. Inspections are much more detailed examinations that go beyond assessing the basic soundness and safety of a home. An inspection can often uncover problems not detected by an appraisal.
HUD believes the new FHA appraisal system requiring more thorough physical condition reviews could save homebuyers around the nation millions of dollars each year and will save some individual homebuyers thousands of dollars. By alerting homebuyers to major repairs needed in homes they want to purchase, the improved appraisals can enable homebuyers to negotiate lower home purchase prices or enable them to reach agreements requiring necessary repairs to be made to the home before the sale closes.
"The good, thorough appraisals that HUD will now require will help prevent American families from paying too much for their dream house or from buying a house with hidden problems," Cuomo said. " It can take the surprise, and even shock, out of homebuying."
About 41,000 private contractors around the nation perform mandatory appraisals before the sale of every home financed with an FHA mortgage. These appraisers, who must be licensed or certified by their state, are hired by lenders. HUD will send them letters notifying them of the reinvented FHA appraisal system that the Department is creating.
Cuomo was joined at today's news conference by Frank and Shannon Sinigaglio, who bought a home in Penns Grove, NJ, in 1996 for $85,000 with an FHA mortgage and were shocked to learn afterward that an appraiser never reported a series of major problems with the home that would cost more to repair than the home is worth. The problems include serious damage to the home's foundation, a roof that needs to be replaced, termite damage, a bathroom with no electricity, a shower with poor drainage, and leakage of sewage gases into the bathroom.
The couple, who have three daughters, said they cannot afford to make needed repairs to their home, which was built in 1920.
"At settlement, there was no mention of repairs needed to the house," Frank Sinigaglio said. "So it seems obvious to us that no one ever did much of an appraisal. When he came to our house, the appraiser seemed to follow three rules: see no evil, hear no evil, and speak no evil."
In addition to the Homebuyer Protection Plan, Cuomo said HUD plans to protect taxpayers from unnecessary costs by privatizing the sale of homes acquired through FHA foreclosures, generating savings of up to $148 million a year. A proposed rule - published May 29 in the Federal Register - would allow HUD to sell foreclosed homes to private real estate professionals, including non-profit organizations. The real estate professionals would maintain, market and sell the homes more efficiently, because they would be free of cumbersome regulations HUD faces. For example, unlike HUD, real estate professionals wouldn't have to rely on sealed bid sales and could market homes through computerized multiple listings.
Here are details of the Homebuyer Protection Plan announced by Cuomo today:
More Thorough Appraisals: HUD will reinvent its FHA home appraisal process by issuing new guidelines requiring appraisers to do much more detailed examinations of homes, enabling them to discover more potential problems. For example, the new expanded basic physical condition survey required of appraisers will have to: describe problems they find rather than merely noting problems without explanation; report all health and safety problems they find; turn on the heat and air-conditioning to see if they work; see if plumbing fixtures and electrical outlets are operating; and note any visible evidence of problems with a home's roof, water supply and septic system. A detailed manual will explain the guidelines.
Primarily as a result of the strong economy created by President Clinton's policies, America's homeownership rate rose to the highest annual level in history last year - 65.7 percent of all households. The rate rose to 65.9 percent in the first quarter of this year. A record 68 million American families now own their homes - 6.2 million more families than when President Clinton took office. The Administration has also pursued an aggressive homeownership strategy - including creating the National Partners in Homeownership, creating Homeownership Zones, toughening enforcement of the Fair Housing Act, and cutting FHA fees. FHA plays a key role in HUD's homeownership programs.
- Disclosure of Home Defects to Potential Buyers: For the first time, HUD will require that homebuyers be notified of problems that appraisers find in a home. HUD will continue to require appraisers to notify the seller and lender, and major repairs will still have to be made before an FHA mortgage can be issued. Notifying homebuyers of these problems and repairs will enable them to make a more informed decision about purchasing the home.
- Stricter Accountability and Tougher Sanctions for Appraisers: The Homebuyer Protection Plan will create uniform national appraisal standards and will impose tough new penalties - including civil and criminal fines and potential prison sentences under the federal False Claims Act - for appraisers who act improperly. HUD will make the appraisal an official submission to the federal government, opening appraisers to legal action under the False Claims Act for the first time if they state falsely that they conducted the appraisal in compliance with FHA guidelines. The False Claims Act makes it illegal to knowingly file a false statement with the federal government. Civil violations of the False Claims Act carry a penalty of a $5,000 to $10,000 fine for each false claim, plus treble damages suffered by the government. Criminal violations are less common and require a higher level of proof of intentional wrongdoing, such as a conspiracy to knowingly defraud the government. Criminal violations carry a maximum penalty of five years in prison and a fine of up to $10,000. In addition, for the first time, FHA will issue a list of uniform national penalties for specific violations of appraisal guidelines. The penalties - consisting of suspensions from FHA appraisal work for up to a year - will standardize and in most cases increase existing penalties used by HUD's 81 field offices. Examples of penalties include suspension from FHA appraisals for up to one year if an appraiser: fails to report substantial defects at a property costing $5,000 or more to repair; submits an appraisal of a property in which he or she has a financial, familial or other conflicting interest; and fails to report defects that may impair the health or safety of occupants of the home, such as a broken heating system or a termite infestation. HUD could take debarment action against appraisers committing the most serious violations to prevent them from doing FHA appraisals for years or even permanently. Through its new Enforcement Center, HUD will hire contractors to review 10 percent of the approximately 800,000 FHA appraisals each year - an increase from the current review rate of 6 percent. The reviews are an enforcement tool to find appraisers violating HUD's appraisal guidelines.
- Recommendations of Needed Inspections: HUD will require appraisers to recommend to homebuyers that they get a full inspection of a home they are considering purchasing if the appraiser finds significant problems with the home. Because inspections are much more detailed than appraisals they can detect major problems not found by an appraisal.
- Home Inspection Fee Financed by HUD: HUD will allow homebuyers to finance up to $300 in home inspection costs through FHA mortgages - up from the current $200 figure, to account for inflationary increases in the costs of inspections. HUD also will allow and recommend that communities use funds from HUD's Community Development Block Grants and HOME program to pay for home inspections for low- and moderate-income homebuyers.
- Increased Homeownership Counseling: HUD seeks to increase assistance to housing counseling agencies, which help educate families about ways to buy and keep their homes. A proposal in HUD's 1999 budget seeks a 25 percent increase in funds for homeownership counseling, for a total of $25 million next year. Counseling helps homebuyers learn about potential problems to look for before they buy a home, emphasizes the importance of a full home inspection, helps buyers determine how much they can afford to spend, and teaches negotiating skills that can cut the price of a home purchase. HUD funds about 400 local housing counseling agencies and five national nonprofit organizations.
- Speedy FHA Mortgage Application Review: HUD will make available its own powerful new high-speed loan evaluation system to all FHA lenders later this year. FHA began using Freddie Mac's Loan Prospector computerized loan evaluation system in March - cutting the time it takes to evaluate a homebuyer's application for an FHA-insured mortgage from four weeks to two minutes, dramatically reducing paperwork, and enabling more families to qualify for FHA mortgages. FHA is also now using a similar system from Fannie Mae in a pilot project. While the Freddie Mac system is available only to FHA lenders that do business with Freddie Mac and the Fannie Mae system is available only to some lenders doing business with that organization, HUD's system will be available to all FHA lenders. Freddie Mac and Fannie Mae are government-sponsored enterprises that buy mortgages from lenders, package them into marketable securities, and sell them to investors.
- Lower FHA Premiums: HUD will hold down the costs of FHA premiums to the level achieved earlier in President Clinton's Administration, when FHA reduced its upfront mortgage closing costs four times. The cuts reduced average FHA closing costs for first-time homebuyers by $1,200 around the country and by $1,400 in central cities.
- Keeping Buyers in Their Homes: HUD will develop a system to do a computerized analysis of homebuyers with FHA mortgages who miss two or more monthly payments. This will enable FHA and lenders to work with the homebuyer to provide credit counseling and other assistance to help avoid defaults.
FHA does not make mortgage loans directly, but rather insures loans made by private lenders to homebuyers. FHA insurance guarantees the lender timely payment of principal and interest, in the event the homebuyer defaults on the loan. Because FHA mortgage insurance protects lenders from losses, it enables many Americans who otherwise would have been unable to qualify for mortgages to get the loans and become homeowners. Over its six-decade history, FHA has made homeownership available to about 25 million families.
FHA-insured loans benefit homebuyers in these ways: 1) Down payments can be as low as 3 percent - lower than the minimum that lenders generally require for non-FHA mortgages. High
down payments are a major roadblock to homeownership. 2) Homebuyers can borrow closing costs in their mortgages - something not permitted with many non-FHA mortgages. 3) FHA's requirements for homebuyer credit ratings are more flexible than those set by many lenders for non-FHA borrowers. 4) FHA permits homebuyers to use gifts from family members and non-profit groups to make their
down payments, while conventional loans generally require homebuyers to come up with
down payments on their own. 5) FHA permits a borrower to carry more debt than a private mortgage insurer would allow.
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