Appraisers, are you completing your FHA reports correctly?

I received an email recently from a local appraiser who was concerned that they may not be completing their FHA assignments correctly. The main point of the problem concerned termite inspections and whether an inspection should be called for in the appraisal. The department of Housing and Urban Development (HUD) has recently started reviewing appraisal reports for compliance to their guidelines and the guideline about termite inspections seems to be the source of some confusion, so I thought I would discuss it here.

I wrote a post back in 2012 about FHA rules for termite inspections that had been recently changed. It appears that with the new HUD reviews that the rules were misunderstood. Here is a recap of what the rule said which is taken from the HUD website and that applies to properties over one year old:

FHA does not automatically require inspections to be made on all loans, however several situations do require pest inspections. Appraisers are to indicate on the appraisal form if there was evidence of infestation of wood boring insects in the house and/or other structures within the legal boundaries of the property.

• Further inspection is required when any of the following apply:
  • At the lenders discretion;
  • When it is required by local and/or state laws – FHA does not require the lender to submit evidence or documentation in the case binder that the state or local jurisdiction does or does not require a test or inspection;
  • When it is customary to the area;
  • There is evidence of:
    • Decay
    • Pest Infestation
    • Suspicious damage
• When a clear inspection report is required on an existing property seeking FHA mortgage insurance:
  • The National Pest Management Association form NPMA-33, Wood Destroying Insect Inspection Report must be completed. Or if the property is located in a state having a mandated wood infestation form, then the state mandated form must be used. At this time the following states have their own mandated form for wood destroying insect infestation and the use of the NPMA-33 is NOT required: Alabama, Arizona, California, Florida, Georgia, Hawaii, Louisiana, Maryland, Mississippi, Nevada, North Carolina, Oklahoma, South Carolina and Texas. When a clear report is required, all improvements within the property lines must be inspected and be free of active infestation. The validity period is 90 days from the initial date of inspection. (Please See ML 95-33. Form NPMA-33 replaced form NPCA-1 effective January 1, 2005).

There was some confusion when HUD indicated that termite inspections are not automatically required. They were trying to make the verbiage as generic as possible for all areas of the country since some areas are at very little risk of termite infestation, and other areas are at high risk. Most appraisers took this to mean that no termite inspection was required at all, and it also appears that many mortgage professionals believed the same to be true. After speaking with a HUD appraiser he explained that the key phrases in the requirements that should not be overlooked were the following:

• When it is required by local and/or state laws; and
• When it is customary to the area

If it is required by local or state law then the state will have a mandated form to be used when property is being sold, and you can check with your local board of Realtors ® to verify if that exists. The second way is to determine if it is customary to the area, and this can be done by consulting the Termite Infestation Probability Map (TIPS), which I have included below.

As you can see, my state of Alabama is in a very high risk area so it would be necessary to complete the appraisal assignment in accordance with FHA Mortgagee Letter 2005-48, and make it subject to an official Alabama wood infestation inspection report being completed by a pest control expert. The appraiser is not allowed to complete the assignment “as-is” if they have not been provided a copy of the report. It is also not necessary for the appraiser to complete a final inspection report because it is the responsibility of the lender to obtain the wood infestation report and satisfy their requirements based on the expertise of the pest professional. The appraisal would be made subject to the termite inspection and based on the extraordinary assumption that the condition or deficiency does not require alteration or repair. In other words, if the property passes the termite inspection then everything should be o.k. and the loan officer can approve the loan without any further action by the appraiser.

What are your thoughts on this as an appraiser or lender? We don’t really have much choice in the matter as this is a HUD/FHA requirement. How have you been doing appraisals, or as a lender what have you been requiring from your appraisers?

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