HUD Appraisal Rules on HUD REO property

HUD issued Mortgage Letter 2013-44 on December 6, 2013. Majority of lenders implemented this rule in early February 2014. Although this rule is a year old, I wanted to post this as a reminder because I'm seeing some issues especially with over bids and properties with repair escrows.

HUD addressed the following in the Mortgagee Letter:

• Conditions that require a new appraisal on a HUD REO property, and
• Clarified their policy on the use of distressed properties as a comparable sale to establish value for HUD REO property.

New Appraisal Required

A new full appraisal must be ordered on a HUD REO property if any of the following conditions exist:

If a new appraisal is required based on the conditions above, the following applies:

• The original HUD ordered appraisal may not be used to underwrite the loan;
• HUD will not pay for the cost of the new appraisal. The borrower may be charged for the new appraisal as part of the borrower’s closing costs;
• A written justification for the new appraisal is required (documentation that one of the above conditions existed);
• Copies of all appraisals of the property must be retained in the loan file.

When the new appraisal is ordered, the new appraisal value may be less than the sales price and even HUD appraisal value. Sometimes there can be significant differences. This can cause the buyer to come out of pocket additional funds to cover the difference more than what the buyer had estimated when they made the over bid if they wish to complete the purchase. The significant difference in value most often arises with property that has major deferred maintenance and damage that does not exceed the $5000 repair escrow but has a bigger impact to value than the cost of the repairs would suggest (this is specific to HUD REO with repair escrow). 

Please keep this appraisal rule in mind when working on HUD REO properties.