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FHA Delays New Appraisal Rules

The Federal Housing Administration has pushed back to Feb. 15 implementation of new rules for appraisals that were originally scheduled to take effect on Jan. 1, in order to give FHA and lenders more time to adjust systems to accommodate the changes.

The new rules are intended to bring FHA appraisal policies into “full alignment” with rules employed by Fannie Mae and Freddie Mac since May 1 to protect appraisers from coercion, the Department of Housing and Urban Development (HUD) said in announcing the changes in September.

Real estate industry groups have complained that the new rules governing appraisals for Fannie and Freddie, the Home Valuation Code of Conduct, have derailed sales because they have shifted work to appraisal management companies, some of which have allegedly employed inexperienced appraisers.

FHA’s new appraisal guidelines may not have the same effect, because they include “geographic competency” requirements for appraisers, and allow lenders to pay separate, market-based fees to both appraisers and appraisal management companies.

In a bulletin e-mailed to lenders Tuesday, HUD said implementation of two “mortgagee letters” governing appraisals, ML 2009-28 and ML 2009-51, has been pushed back to Feb. 15.

Regulators say they continue to expect that lenders will begin using new loan disclosure forms on Jan. 1, in order to comply with new Real Estate Settlement Procedures Act (RESPA) rules.

HUD has promised to “exercise restraint” in enforcing RESPA rule changes during the first four months of 2010 for those who can demonstrate they are making “a good faith effort” to comply.

That does not mean it’s OK to continue using the old good faith estimate (GFE) and HUD-1 settlement statement forms, Federal Housing Commissioner David Stevens said in a Dec. 17 letter.

“The idea that lenders, brokers and closing agents can delay implementing the new Good Faith Estimate and HUD-1 Settlement Statement beyond Jan. 1, 2010, is incorrect,” Stevens said. “After Jan. 1, the only circumstance where the old HUD-1 form can be used is when the most recent GFE the borrower received was issued in 2009 on an old form. There should be no confusion about when the mortgage industry must begin using the new forms.”

The new GFE and HUD-1 forms, and other information on implementation of the new RESPA rules, are available from HUD on a dedicated RESPA page.

Stevens also said it will probably be the end of January before HUD puts forward a formal proposal for implementing tightened underwriting standards on FHA-backed loans, as outlined by Housing Secretary Shaun Donovan on Dec. 2.

Donovan told lawmakers that with FHA’s capital reserve ratio having fallen below a 2 percent statutory minimum established by Congress, HUD plans to increase the amount of upfront cash homebuyers must bring to the table, raise minimum FICO scores for new borrowers, and reduce maximum seller concessions from 6 percent to 3 percent.

Donovan also said HUD is considering raising FHA mortgage insurance premiums. HUD has the authority to raise upfront premiums from the current 1.75 percent to as much as 3 percent, but would need approval from Congress to raise annual premiums for new borrowers beyond the current level of 0.5 percent.

HUD typically provides at least 60 days’ advance notice after issuing formal notice of a policy change, so if a proposal is put forward at the end of January, it might not take effect until April.

Stevens said he could not comment on when FHA will actually implement the planned tightening of underwriting standards “until decisions have been reached on new policies or policy changes and the manner in which they will be introduced. However, as part of our process of exploring policy options, we will reach out to many industry players to better understand operational impacts in order to best assess a fair implementation time line.”