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CUOMO SAYS HUD'S HOMEBUYER PROTECTION PLAN WILL REINVENT FHA'S APPRAISAL PROCESS TO BENEFIT 800,000 FAMILIES EACH YEAR
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." [See Sinigaglio Consumer Profile]
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:
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) Downpayments can be as low as 3 percent - lower than the minimum that lenders generally require for non-FHA mortgages. High downpayments 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 downpayments, while conventional loans generally require homebuyers to come up with downpayments on their own. 5) FHA permits a borrower to carry more debt than a private mortgage insurer would allow.
Content Archived: January 20, 2009