www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 May 21, 1996 MORTGAGEE LETTER 96-26 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production: Appraisal and Appraiser Standards; Lender Selection of Appraisers Effective May 1, 1996, Part 267 which established the minimum standards for appraisers and property appraisals on single family dwellings was deleted from the Code of Federal Regulations. Section 202(e) of the National Housing Act requires the Secretary to prescribe standards for the appraisal of property to be insured by FHA. Those standards must be in writing. Many of the standards contained in Part 267 are contained in either Mortgagee Letter 94-54, dated November 7, 1994, or HUD Handbook 4150.1 REV-1, Valuation Analysis for Home Mortgage Insurance. This mortgagee letter will provide all standards contained in Part 267 that are not contained in either Mortgagee Letter 94-54, or HUD Handook 4150.1 REV-1. Competency Although appraisers must be either state licensed or certified, an appraiser shall not be considered competent or suitable solely by reason of having been licensed or certified by a state. Every determination of competency shall be based upon the appraiser's individual qualifications and character and upon his or her experience and educational background as they relate to a particular appraisal assignment. Appraisal standards Minimum standards. Each appraisal shall be completed in adherence to the following requirements: A. Conform to USPAP, except to the extent that such compliance may conflict with the provisions established by the Department. B. Disclose any steps taken that were necessary or appropriate to comply with the Competency Provision of USPAP. C. Be written and presented on the Uniform Residential Appraisal Report form, the Federal National Mortgage Association (FNMA) Small Residential Income Property Appraisal Report form, the FNMA Individual Condominium Unit Appraisal Report form or any other format that is acceptable to the Secretary. -2- D. Analyze and report in reasonable detail all prior sales of the property being appraised that occurred within one year preceding the date when the appraisal is prepared. E. Analyze and report data on current revenues, expenses, and vacancies for the property if it currently is, and will continue to be, income-producing. F. Analyze and report on current market conditions and trends that will affect income or the absorption period, to the extent they affect the value of the property. G. Contain sufficient supporting documentation with all pertinent information reported so that the appraiser's logic, reasoning, judgment, and analysis in arriving at a conclusion indicate to the reader the reasonableness of the value reported. H. Include in the certification required by USPAP a statement that the appraisal is not based on a requested minimum valuation, a specific valuation or range of values, or the approval of the loan. The certification shall also include a statement that the racial/ethnic composition of the neighborhood surrounding the property in no way affected the appraisal determination. I. Follow a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value required by the Secretary, reconciles or explains any differences those approaches yield in determining the value of the property in question, and gives the reason(s) for rejecting each approach that was not used. If information required by the above is not available, that fact shall be disclosed and explained in the appraisal report. In addition to the minimum standards set forth above, a Direct Endorsement mortgagee may adopt generally, or may impose in specific cases, such supplementary standards as are reasonable, appropriate, and consistent with the Department's appraisal policy. Conflicts of Interest A mortgagee must avoid conflicts of interest and other relationships which affect, either in reality or in appearance, the credibility of the appraisal. Accordingly, a mortgagee may not contract with an appraiser or appraisal organization to perform an appraisal of a property if the builder or seller of the property owns, is owned by, is affiliated with, or has a financial interest in the appraiser or appraisal organization. An appraiser must avoid conflicts of interest and other relationships which affect, either in reality or in appearance, the credibility of the appraisal. Accordingly, an - 3 - appraiser may not have any interest, direct or indirect, in the property being appraised. An appraiser of a Direct Endorsement mortgagee may not have any direct interest, financial or otherwise, in the property being appraised, and is permitted an indirect interest only by reason of his or her employment by a mortgagee that has its appraisal operations isolated from its other activities in accordance with Departmental policy. Transfer of appraisals between mortgagees A Direct Endorsement lender may accept an appraisal that was prepared by an appraiser engaged directly by another mortgagee, provided that the appraisal was performed in accordance with the Department's requirements and that the mortgagee accepting the appraisal has: 1. Reviewed the appraisal report under its review procedures; and, 2. Found the appraisal to be acceptable. Any questions concerning this memorandum or the Department's appraisal policy should be directed to the local HUD Office. Sincerely, Nicolas P. Retsinas Assistant Secretary for Housing Federal Housing Commissioner ??