Although new appraisal requirements on FHA-insured loans have been in the works for more than a year -- and were delayed a month to give appraisers more time to learn the new rules before they took effect 10 days ago -- valuation experts are far from ready to handle the load.

And even though the Department of Housing and Urban Development expected some disruption while appraisers became familiar with the new process, evidence is mounting to indicate that the market is for more unsettled than government officials anticipated.

According to Donald Kelly of the Chicago-based Appraisal Institute, as of Sept. 10, when the Home Buyers Protection Plan went into effect, only about 5,000 appraisers have taken the one-day, AI-sponsored FHA update seminars designed to familiarize them with the new order of things.

To be placed on the roster of FHA-approved appraisers, valuers must pass a 50-question exam based on the new rules. Previously, they have not had to take any kind of exam. But now they have to answer 35 of the questions properly or they fail.

Appraisers don't necessarily have to take additional training to pass what amount's to an open-book test. But Kelly said many of his members still have questions, even after reading the new manual and asking questions at their HUD Home Ownership Centers. So they are opting for additional training,

The Appraisal Institute expects another 5,000 appraisers to take the AI course by the end of the year. And with 5,000 others taking a similar class sponsored by other educators, there should be more than enough fully trained appraisers to handle the volume -- the FHA will underwrite 1.2 million loans in fiscal '99 -- "by early next year."

For the time being, though, there aren't enough to go around. And as a result, some appraisers so overloaded they're weeks or even months behind. Furthermore, many are jacking up their fees to cover the additional work and what they believe is greater liability on their part.

The disruption was not unexpected, according to FHA Commissioner William Apgar. "We knew it would cause some disorder, but people tend to forget all those people who paid inflated prices based on faulty appraisals and ended up losing their homes."

The enhanced appraisal standards are designed to protect unknowing consumers from purchasing homes that are not sound. A revised Valuation Conditions form, for example, describes the condition of the property in a series of easy-to-understand "yes" or "no" format. The form must be completed by the appraiser and delivered to the borrower at least five days before closing.

Despite the program's lofty goals, three states -- Arizona, Nevada and North Carolina -- have advised appraisers to be extremely careful in accepting assignment to value properties being purchased with FHA-insured loans.

Noting that the new rules require appraisers to look for termite infestation, soil contamination, drainage problems and structural and mechanical deficiencies, The Arizona Board of Appraisal warned valuers under its jurisdiction not to undertake appraisals if they do not "possess the knowledge and experience to perform the work completely."

Elsewhere, meanwhile, appraisers are saying they won't work on FHA loans under any circumstances. In an extreme -- and unconfirmed -- example, only six of Alaska's 83 FHA appraisers are said to be still active. And they are reportedly so heavily booked that they will accept new assignment on a case-by-case basis.

There is no indication yet as to whether or not liability insurance rates will rise. According to Robert Wiley of Liability Insurance Administrators, a major provider of errors and omissions coverage, insurers won't be able to determine the effect of the changes on claims for the next 18-30 months.

Nevertheless, appraisers are reacting as if rates have already risen because of what they at least perceive as greater liability on their parts. They're worried, said one real estate broker, "over who will take the rap if the property turns out to have a problem."

With all of this going on, some real estate professionals are advising buyers and sellers to avoid FHA financing -- buyers because the inability to obtain an appraisal could delay closing for weeks or even months, and sellers because they could be forced to make costly repairs to their properties if defects are discovered.

Published: September 20, 1999

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.