Uncovering Flaws in FHA Appraisal & Loan Review Process

The story of this single mother’s harrowing experience with a defective home purchase and HUD’s negligent oversight exposes deep flaws in the FHA appraisal and loan review process. After sacrificing for years to rebuild her credit and earn the right to become a homeowner, this borrower found her dream home in the country – or so she thought. During the home inspection, several issues were flagged. The seller, an investor who had purchased the home in an estate sale, was unaware of the system’s location. The seller agreed to have the tanks pumped so the location could be determined. By the time the AMC appraiser arrived, the septic tank had been located and left uncovered for the appraiser to observe. Despite this, the AMC appraiser marked the home as having public water and sewer, failing to note the FHA’s minimum property requirements for the distance between the well and septic. The appraisal was approved, and the home closed.

Three months later, the borrower began experiencing plumbing issues and learned the well and septic system needed to be completely replaced at a cost exceeding $100,000 – far beyond her means. In researching FHA guidelines, she discovered the glaring violations that should have been caught. When she reported the error to the lender, she was told the appraisal was only meant to determine value, not ensure the home met FHA minimum property standards. HUD echoed this, placing the burden on the borrower’s home inspection. Stuck in a nightmare situation, the borrower filed suit against the lender and appraiser.

What followed was a drawn-out legal battle filled with obfuscation and deception. The lender tried to claim the borrower had purchased the home “as is,” ignoring the FHA’s specific requirements. HUD, when contacted, refused to intervene, stating there was nothing they could do. It was only through the borrower’s dogged persistence that she uncovered a disturbing pattern – HUD allows lenders to self-report loan defects and categorize them in ways that minimize penalties, even when the issues are severe enough to make a home unlivable. In this case, the lender classified the defect as a Tier 4, meaning they “did not know and could not have known” about the issues, despite evidence to the contrary.

Worse still, HUD acknowledged the lender was required to order a field review when a borrower complains, but told the lender they did not have to do so in this case. The appraiser, meanwhile, was found to have intentionally omitted key details from the appraisal, cropping out a deck and fence, and failing to note numerous other issues that should have required the home to be appraised “subject to” repairs. Yet when the borrower sought to depose the appraiser, the request was dismissed as “laughable.”

Ultimately, the courts sided with the lender and appraiser, leaving the borrower and her children homeless and financially devastated. HUD’s response to inquiries revealed that the defect categorization was improper and the lender should have been required to mitigate the issue, but the agency has done nothing to rectify the situation. This single mother’s relentless fight has laid bare HUD’s failure to properly oversee the FHA appraisal and loan review process. Her story is a damning indictment of a system that allows predatory practices to thrive at the expense of those it is meant to serve.

In her own words, the following is her story:

“Losing the Battle to Win the War: How a single mother of two’s refusal to quit exposed HUD’s defected defect taxonomy

In December of 2020 recently divorced borrower and single mother of two found a quaint home in the country, 60 miles from their previous, to start over with her children. She spent the prior two years sacrificing and rebuilding her credit her ex-husband destroyed, to earn the right to become a homeowner. She submitted an FHA offer and scheduled her own home inspection. As most home inspections do, the inspector flagged numerous items that she added in an amended sales contract for the seller to have fixed. The listing stated the property was well and septic, however the seller, who was an investor, purchased the home as an estate sale therefore did not know its location, nor was it on the survey. She asked to have the tanks pumped in order for the seller to locate it. It was located weeks after her home inspection and left uncovered in the home’s front flower bed less than 10ft from the home’s front door prior to appraisal for the appraiser to observe.

By definition, an FHA appraisal is to determine the following:

• Safety: The home should protect the health and safety of the occupants.
• Security: The home should protect the security of the property.
• Soundness: The property should not have physical deficiencies or conditions affecting its structural integrity.

And as noted, an FHA loan is contingent upon the appraisal determining the home meets FHA Minimum Property Requirements including those regarding minimum distance requirements between well and septic. Her contingency clause was as follows:

2. APPROVAL OF FINANCING: Approval for the financing described above will be deemed to have been obtained when Buyer Approval and Property Approval are obtained.
3. PROPERTY APPROVAL: If Buyer’s lender determines that the Property does not satisfy lender’s underwriting requirements for the loan (including but not limited to appraisal, insurability, and lender required repairs) Buyer, not later than 3 days before the Closing Date, may terminate this contract by giving Seller: (i) notice of termination; and (ii) a copy of a written statement from the lender setting forth the reason(s) for lender’s determination. If Buyer terminates under this paragraph, the earnest money will be refunded to Buyer. If Buyer does not terminate under this paragraph, Property Approval is deemed to have been obtained.

The appraisal came back meeting value and the home closed in early 2021. Three months later, she began experiencing plumbing issues and was told not only did the system need to be replaced, but it needed to be brought to current code. Meaning not only did the well and septic have to be moved, but the home’s current water well had to be capped and a new one drilled due to the size of the lot not having sufficient space for repair or replacement, which caused estimates to exceed $100,000.00. This prompted her to google FHA minimum property requirements on Well and septic where she discovered FHA required a minimum distance of 50 feet between a home’s water well and septic as well as 100ft between a home’s water well and septic drain field. Her well was 40ft from the septic and 66ft from the drain field. She then referenced the appraisal to discover that it was marked as public despite the listing stating it was well and septic, seller’s disclosure stating it was well and septic, and an On Site Sewer Facility Form attached to the listing. She contacted her lender to report the error and omission who stated an FHA appraisal is to determine value only. She contacted the AMC who told her the responsibility was the appraiser and underwriter at the lender. She contacted the appraiser who said she could not talk to her because the lender was her client. She contacted HUD who told her an FHA appraisal is to determine value only and instantly deflected to her home inspection. A borrower’s home inspection is not only not used to determine the property meets minimum property requirements, it is not even provided to the lender or appraiser, and the borrower, nor the borrower’s inspector, are aware of FHA minimum property requirements.

This left her with no choice but to file suit against the lender and appraiser. She was forced to live in the health hazardous house with her two children due to not having finances for alternate living expenses on top of attorney’s fees. She sat through 6 hours of deposition with the lender asking what her fee schedule was, how much money she made, and if she had any interest in becoming an attorney. She stated the difference in a FHA appraisal being “as is” or “subject to”, and told them had the appraiser notated it correctly as well and septic, there would have been requirements the property could not physically meet. She provided them evidence of other appraisers complaining that this lender “forcefully” tells appraisers they only accept “as is” appraisals. Meaning any required FHA repair requirements that would make it “subject to” has to be removed, to which the appraiser’s attorney asked if “you can believe everything you read on the internet.” When it became apparent the lender had financially drained her with four discovery requests and two depositions, her own original attorney told her “the lender might let you add the defaulted amount to the end of the loan” and resume living there without resolution. They parted ways after that.

A year and a half after reporting the error and omission, only through discovery requests to HUD by the lender she obtained a copy of HUD’s Loan Review, and Appraisal Desk Review.

She learned that HUD not only relies on the lender to “self-report” loan defects, they get to choose the defect category out of the 9, some of which having lesser penalties than others.

The lender chose the category of property eligibility rather than property appraisal because the category of property appraisal incriminates “appraiser and/or underwriter” and is a severity level of 2 requiring Mitigating Documentation OR Indemnification – Life-of-Loan and states

FHA is unable to determine appraiser and/or underwriter compliance with applicable policies for the appraisal, collateral valuation, or property acceptability due to absence of valid documentation.

FHA is able to conclude that the property was not appraised and/or underwritten in compliance with applicable policies and the appraised value is not supported or the property is not acceptable as a result.

Documentation required for specific property types, programs/products, or by construction status was not obtained to support FHA max insurable loan amount.

FHA closed the review stating to the lender. “Thank you for the self-report regarding the properties well and septic. FHA has taken the appropriate actions and has determined that lender could not have known about the well and septic prior to closing. No further action is required.”

It was classified as Tier 4 (indicating that the Mortgagee did not know and could not have known).

Which didn’t make sense because HUD states Lenders, including sponsoring lenders, are equally responsible, along with appraisers, for the quality, integrity, accuracy and thoroughness of appraisals, so to tell a lender there’s no way they could have known something that their Desk Review determined to be public information leaves a loophole for fraud. She told HUD by not requiring a lender to verify what an appraiser marks as a home’s water source leaves no check and balance on that item for an appraiser to simply notate public water in order to bypass required inspections. She told them so many times that HUD stated they would no longer be replying to her.

Despite the Desk Review determining 18 appraisal deficiencies in this single appraisal, including knowingly omitting things, the appraiser received 14 hours of continuing education and is still on the FHA roster.

She also noticed that the severity of the defect taxonomy was based on property eligibility, which was something she always wondered why no one ever cared to determine. When she asked her original attorney to request a second appraisal, the lender’s attorney stated “why would we order something that would prove us wrong.”  So she researched and learned a field review to determine the properties eligibility was required. It took a Congressional inquiry, months later, for HUD to acknowledge this with the following.

The U.S. Department of Housing and Urban Development (HUD) through the FHA provides mortgage insurance under the National Housing Act to qualified Direct Endorsement (DE) lenders.  HUD/FHA does not review applications for mortgage insurance prior to the mortgage being executed.  Rather, FHA insures the mortgage proceeds and relies on the DE Underwriter to ensure, among other things, that both FHA and the lender’s mortgage loan requirements are met. It’s ultimately the DE Lender’s prerogative to make a final decision based on the loan file in its entirety.

Ms. XXXXXX correctly states that the Mortgagee is required to perform a field review when they receive a complaint from a borrower. HUD Handbook 4000.1 – II.V.A.3.c.ii.(C).(1).(b) Property and Appraisals, Field Reviews, states “The Mortgagee’s appraisal field review sample must include the following… all Mortgages for which the Mortgagee has received a Property complaint from the Borrower(s).” However, this requested review must be ordered by the lender. HUD doesn’t perform or direct valuation reviews. Ms. XXXXXX should request such a review from her lender.

However, when she presented this to the lender, they refused to order one, then filed a cross claim against the appraiser for negligence and fraudulent concealment almost 2 years to the day the error was reported. The lender then requested a motion for summary judgment, claiming they owed the borrower no duty of care. In that hearing they mislead the court claiming she purchased the home “as is” implying the conventional meaning of the term rather than the federal definition being,

The federal “as is” requirement is IN ADDITION TO the GSE scope of work which REQUIRES CONDITIONING THE APPRAISAL ON COMPLETION OR REPAIR when there are conditions that adversely affect the livability, soundness or structural integrity of the property.

The lender also lied to the court stating her home inspection found multiple deficiencies in the septic system, which could not be physically possible, as it was not located until weeks after her home inspection by the seller. When her attorney presented the congressional inquiry response regarding refusing to order the required field review, the lender proceeded to read an email from the same person at HUD that confirmed it was required, stating that the lender in fact did not have to perform one. The lenders attorney went on to state, “we are not saying she doesn’t have a remedy or leaving her without one, they are right here.” Pointing out the appraiser’s counsel. Ultimately the Judge ruled the lender owed her no duty of care and despite HUDs rules and regulations stating,

Interior reviews are an important part of the field review since a serious oversight by the appraiser of a noticeable defect in the property could affect the health and safety of the occupants or the continued marketability of the property.

She learned in that hearing that HUD told the lender they do not have to perform one and refuse to give her a reason why.

Two years and six months after discovering the error and omission, she discovered yet more intentional errors and omissions in the appraisal including physical items that the appraiser marked did not exist.

This prompted her to recall the discovery questions in which they asked the appraiser to provide all pictures taken at the property to which the appraiser produced the appraisal only, not all of the pictures taken at the property. The appraiser did not produce all original pictures, because the ones used in the appraisal cropped out the deck and fence from all views.

HUD’s desk review could not determine these errors and omissions because without the required field review viewing the physical property, no one knows all the items that SHOULD HAVE been marked “subject to” that were not.

• The appraiser checked no 20×10 deck existed and cropped it out of view of all pictures
• The appraiser checked no 240 ft fence existed and cropped it out of view of all pictures
• The appraiser did not mark the window egress that did not meet FHA requirements subject to
• The appraiser did not mark the garage door that required sensors subject to
• The appraiser did not mark the roof that required 2 years of life subject to
• The appraiser did not mark one item subject to further repair which per the FHA quality control requirements on an older home that in of itself required a field review prior to closing.

Her new attorney requested to depose the appraiser due to the recent discovery of more intentional errors and omissions, as well as the fact the previous attorney never requested it, to which the appraiser’s attorney filed a reply stating that it was “laughable” and due to the buyer’s “laziness” and that the appraiser should not be “held captive”.

The Discovery process is a constitutional obligation to ensure a fair trial. The exchange of evidence by both sides is critical to the fair outcome of a case.

She did not get to depose the appraiser.

Weeks later the appraiser requested a motion for summary judgement using the same game plan as the lender did, and again the appraiser’s attorney claimed she purchased it “as is” and that the appraiser “did everything they could” to state she was not an intended user.

It was obvious the appraiser also “did everything they could” to conceal any item that would have required the appraisal be marked “subject to” as well.

Her attorney replied using HUD’s Valuation protocol stating:

23. “Who May Rely on Appraisal Report – The borrower, another lender at the request of the borrower, the mortgagee or its successors and assigns, mortgage insurers, government sponsored enterprises, and other secondary market participants may rely on this appraisal report as part of any mortgage finance transaction that involves any one or more of these parties.”

As well as the defense of 552 negligence in tort which Texas has adopted and states:

“Section 552(1) provides: One who, in the course of his business, profession or employment, or in any transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.”

The judge then asked her attorney “How do you get around the fact that she purchased it as is?” and it was in that moment she knew that not only was his mind made up but that he was completely mislead, which was proven by his entering of the order less than 2 hours after the hearing.

In order for a court to grant summary judgment the movant must show that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The court should state on the record the reasons for granting or denying the motion.

The Judge ultimately granted the appraiser’s motion for summary judgement and listed no basis.

Now not only is she appealing the civil courts decision, she will be filing a Qui Tam False claims act which allows persons and entities with evidence of fraud against federal programs or government contracts to file a qui tam lawsuit against the wrongdoer on behalf of the United States Government.

The mental, physical and financial effects of this have been surmounting daily for almost three years. Her credit that took her two years to repair to earn the right to buy a home has dropped 200 points. They became homeless due to the home becoming so full of mold, and have had to move four times in the past year. Not to mention if the appeal is denied she will be vulnerable to be sued for the balance of a loan that the property cannot justifiably meet value for and the chances of them ever being a homeowner again is all but lost due to the over 25% increase in home prices at double the interest rate since she purchased in 2021.

Good faith must be required in fair dealing and without honesty there is no fair dealing.

She recently received the following from FHA commissioner Julia Gordon after telling her of the situation:

“According to my team, they have looked into your situation multiple times and have determined that there is nothing HUD can do. They have advised you to file a complaint with your state regulators. While I have asked them to go back to look again, I do not have any reason to believe the answer will be different, and unfortunately another inquiry will likely take at least several weeks at best and possibly longer.”

Have you filed a complaint with state regulators, the CFPB, the Appraisal Foundation, or anyone else besides HUD?

Sincerely yours,
Julia Gordon

Julia R. Gordon
Assistant Secretary for Housing and Federal Housing Commissioner
U.S. Department of Housing and Urban Development”

To which she simply replied “the Lender used your fraudulent response stating “there was no way they could have known of the error” to close my CFPB complaint over two years ago and the Appraisal licensing board cannot collect on my behalf nor make me whole.”

In character with HUD’s cover up, shortly after the email from Commissioner Gordon, through her own research she learned, the following was issued by her:

Mortgagee Letter 2024-12 regarding Fraud or Misrepresentation Involving Sponsored Third-Party Originators stating,

“The Fraud or Misrepresentation section of the FHA Defect Taxonomy currently states that Findings of fraud or materially misrepresented information can fall into one of two severity tiers:

• Tier 1 (indicating that the Mortgagee knew or should have known), or
• Tier 4 (indicating that the Mortgagee did not know and could not have known).

It further states that FHA determines if the Mortgagee knew or should have known based on whether:

• An employee of the Mortgagee was involved, and/or
• Red flags in the loan file that should have been questioned by the underwriting Mortgagee.

Mortgagees are responsible for the actions of their sponsored TPOs under 24 CFR § 202.8(a)(3) and Handbook 4000.1 Section I.A.5.a.v. To better align the Defect Taxonomy with these existing requirements and mitigate risk to the MMIF, FHA is updating the Defect Taxonomy to include fraud or material misrepresentation involving a sponsored TPO as one of the “knew or should have known” conditions used by FHA to determine whether a Tier 1 severity classification is appropriate. Based on this update, FHA will seek life-of-loan indemnification from Mortgagees when there is evidence of fraud or material misrepresentation involving a sponsored TPO, regardless of whether FHA identifies specific red flags that should have been questioned at underwriting.”

Meaning the categorization of her loan defect over two years ago as a level 4 was wrong. Meaning the lender was required to mitigate over two years ago including a principal reduction. Meaning the $50,000 lawsuit was not necessary. Meaning her and her children becoming homeless was not necessary, had HUD performed a competent loan review.

Yet HUD did not update her of this, nor how or if it even will affect her loan review.

She found a HUD job posting stating:

“As a/an Supervisory Review Appraiser, you will: -Ensure the timely and orderly completion of field reviews from HUD staff appraisers or HUD contract review appraisers to ensure the rendering of tactful, meaningful and concise evaluations to the appraiser who prepared the Uniform Residential Appraisal Report (URAR) being reviewed.”

Meaning HUD’s reply to the Congressional Inquiry stating it was the lender’s responsibility to order the required field review was a lie.

The same job listing also mentioned:

“Provide technical support on consumer complaints on building construction and deals with the 518a and 518b repair program requirements.”

So she researched what a 518b repair program was which states:

Section 518(b) authorizes assistance to owners of existing one-, two-, three-, and four-family dwellings when such housing is determined, in accordance with criteria contained herein, to require correction of structural or other major defects which so seriously affect the use and livability as to create a serious danger to the life or safety of the inhabitants.

Extent of Defect. The defect must be a structural or other major defect which so seriously affects the use and livability of the property as to create a serious danger to the life or safety of the inhabitants. To meet this test, the defect must not be speculative or of limited likelihood of becoming an actual danger. A defect which has become a serious danger to the life or safety of the inhabitants, but which was not so at the time of the original appraisal inspection, is not eligible. For those claims involving reimbursement for repairs previously made, the defect must have been such that a judgment can be made that it constituted a serious danger to life or safety at the time of the original appraisal inspection.

Determination of Existing Defect. The defect must be determined by HUD-FHA to have existed on the date the conditional commitment cover the property was issued and must be one that a proper appraisal inspection of the property could reasonably have been expected to reveal.

It goes on to state:

Temporary Relocation of Family. If the repairs required to the property in order to correct the defect involve work on the house which requires moving the family while such work is being performed, the Field Office is authorized to reimburse the family for temporary living quarters while such repairs are being made. This expenditure is not to exceed the amount available to a government family in travel status within the Continental United States.

Meaning her and her children did not need to live in the health hazardous home or become homeless.

It also states:

Defect Not Repairable. If the Field Office determines the defect in the house is such that it is not feasible to expend the amount required to repair it, consideration may be given to assisting the homeowner in disposing of the house by the acceptance of a deed and acquiring another house.”

Meaning the lawsuit was not necessary.

HUD has refused to acknowledge this administrative remedy even exists.

The lender has dropped their cross claim for fraud and negligence. Meaning they were only going to pursue the appraiser if it affected them, not their customer.

With regard to products liability, a defendant is liable when the plaintiff proves that the product is defective, regardless of the defendant’s intent. It is irrelevant whether the manufacturer or supplier exercised great care; if there is a defect in the product that causes harm, he or she will be liable for it.

This is the only industry where a consumer pays for a product, in this case $650.00, and if that item is defective and or causes harm, the appraiser is allowed to CYA out of it.

And the job listing she found said one last thing:

Perform a variety of supervisory functions to ensure that the duties and responsibilities performed by subordinate staff members are completed with promptness and efficiency and have a positive impact on the Processing and Underwriting Division with regard to production, timeframes, and the overall image of the Office and HUD FHA.”

Meaning close as many loan reviews as quickly as possible excusing lenders and appraisers from any liability, lie to the borrower about administrative remedies, and construct a cover up to protect the overall image of the Office and HUD FHA.

In 1999, GAO reported on the need for improvements in HUD’s oversight of appraisers, which has historically been a challenge for the department. Also, in the past, GAO reported that, due in part to poor oversight of appraisers, HUD’s Single-Family Mortgage Insurance programs remained a high-risk area. GAO conducted this review as a follow up to the 1999 report. This report examines (1) how HUD ensures that appraisers it approves are qualified to perform FHA appraisals, (2) the extent to which HUD employs a risk-based monitoring approach, and (3) HUD’s efforts to take enforcement action against noncompliant appraisers.”

The report found that HUD cannot guarantee the quality of its appraisals, nor does it hold lenders/appraisers accountable.

The National Consumer Law Center (NCLC) has issued multiple letters stating the lack of consideration HUD has for the borrower stating:

HUD’s draft defect taxonomy omits consideration of borrower harm in assessing defects and instead focuses solely on protecting the MMIF. In each defect area, HUD defines as unacceptable a defect that “results in adverse impacts on the property or FHA.”3 The scope of the relevant harm never includes harm to the borrower. In fact, HUD fails to mention borrower harm during any discussion of relevant defects despite the agency’s statutory obligation to meet the housing needs of low- to moderate-income borrowers.

In response to any defect, HUD should have a general standard of putting both the borrower and the agency in the position they would be in if the servicer had not failed to comply with the HUD rule.”

Instead, HUD forced a single mother and her two children to live in a health hazardous home and to fend for themselves spending $50,000.00 on an unnecessary lawsuit while covering for the lender and appraiser, and despite the recent acknowledgement that it should have been classified as a severity level of 1 almost three years ago, requiring the lender to mitigate, they have yet to offer any assistance.

@huds_harm“