FHA Updates

During the first several months of 2010, HUD has been very busy, issuing several mortgagee letters and modifying other requirements that affect appraisers. Here are some of the more important changes; this list is not intended to be all-inclusive.

1. Mortgagee Letter 2010-13 was issued, clarifying that the 1004D Update Report may only be used one time to update an FHA appraisal. It also states that when an appraisal is updated by a 1004D, the 1004MC Market Conditions addendum must be completed. The 1004D Update Report may not be used when ordered by a lender who was not an intended user in the original report, unless the appraiser incorporates the original report by attachment. The maximum validity period of an updated appraisal is 240 days.

2. Effective 2/1/2010, FHA Commissioner David Stevens announced a one-year waiver on the 90-day flipping prohibition. This was announced in a press release dated 1/15/2010, available on the HUD website. The FHA will now insure loans on properties that were purchased by the prior owner within the last 90 days. The waiver is limited to sales that meet the following conditions:

a. All transactions must be arm’s-length, with no identity of interest between the buyer, seller, or other parties participating in the transaction. The lender can ensure this by guaranteeing the seller holds title to the property, no pattern of previous flipping activity exists, and the property was marketed openly and fairly by MLS, auction, FSBO, or developer marketing. (Sales contracts that refer to an “assignment of contract of sale” are considered red flags.)

b. If the sales price of the property is higher than the seller’s acquisition cost by 20% or more, the waiver will only be permitted if the lender: (1) justifies the increase in value with loan file supporting documentation and/or a second appraisal; (2) orders a property inspection and provides it to the borrower before closing – the lender may charge the borrower for this inspection; and (3) the waiver does not apply to HECM for Purchase program.

3. Mortgagee Letter 2010-08 was issued, which states that all REO appraisals with an effective date on or after 4/1/2010 have a validity period of 120 days; formerly this period had been six months. This is consistent with ML 2009-30, which pertains to mortgage appraisals.

4. Mortgagee Letter 2010-17 was issued, which changes the way appraisers report defective paint on HUD REO appraisals. Previously, on all HUD REO appraisals, the appraiser was required to condition the appraisal on a lead-based paint test, if the home was built prior to 1978. Now, appraisers are only required to report the locations of defective paint surfaces that were observed during the property inspection, on homes built prior to 1978. If no defective paint surfaces were observed, then the appraiser need not explain.

For more information, and to download copies of these mortgagee letters in their entirety, appraisers are
encouraged to visit www.hud.gov.