You assumed that FHA’s involvement as the mortgage insurer protected you against
defects in the house; it doesn’t. You are not the first homebuyer to make that
mistake. FHA has been bedeviled by this problem since it began operations in
1934.
The assumption that FHA would protect the homebuyer is reasonable. FHA requires
a property appraisal, and that homes meet certain "minimum property requirements".
That these are designed to protect FHA rather than the homebuyer is a subtle
distinction that is lost on many homebuyers.
The problem took a turn for the worse in 1999 when FHA adopted a new set of
rules regarding appraisals that it trumpeted as a triumph for consumer protection.
The agency described the new program on its web site as follows.
"We are offering FHA homebuyers the best protection against bad appraisals
ever available in the public or private sector. The new appraisal system we
are establishing creates a new level of consumer confidence in the home buying
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 Homebuyer Protection plan that HUD is implementing to cover all homes
purchased with FHA-insured mortgages will:
Require a more thorough basic survey of the physical condition of
the home to uncover potential problems in a home.
For the first time require that home defects found by appraisers be
disclosed to potential buyers.
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…"
But one must read further. Elsewhere on its site, FHA says:
The appraisal is performed for the use and benefit of HUD, and the lender
involved in an FHA transaction… HUD/FHA MAKES NO WARRANTIES AS TO THE VALUE
AND/OR CONDITION OF ANY FHA-APPRAISED PROPERTY, therefore buyers/borrowers
must determine for themselves that the price of the property is "reasonable"
and that it's condition is "acceptable"…
Borrowers should be encouraged to obtain a detailed home inspection of
the property. Borrowers should complete sufficient research of home inspector’s
qualifications and designations to ascertain that they feel comfortable with
the individual they hire. HUD does not maintain lists of approved Home Inspectors.
In other words, FHA has this great program for protecting consumers, but don’t
expect it to assume any responsibility.
The bottom line is that FHA does not guarantee the value or condition of a
home, FHA appraisals are to protect FHA, and homebuyers should protect themselves
by ordering a home inspection.
To drive home the last point, FHA last year developed a new form that must
be signed by all purchasers of existing houses that involve an FHA mortgage.
The form is entitled: "For Your Protection: Get a Home Inspection".
It says that "FHA does not guarantee the value or condition of your potential
new home…That’s why its so important for you, the buyer, to get an independent
home inspection."
The form must be signed on or before the date of the sales contract. Immediately
above the signature, it reads "I understand the importance of getting an
independent home inspection. I have thought about this before I signed a contract
with the seller for a home." You signed the form, even though you may not
have read it, so you’re responsible.
But FHA should be taken to the woodshed. To garner favorable PR for itself
as a champion of the consumer, it strengthened the widespread misperception
that appraisals protect FHA borrowers. Then, to try and repair the damage, it
added one more to the mountain of forms that borrowers must deal with at closing.
This is not government at its best.
March 19, 2001
