Is FHA Responsible For the Leaky Roof?

...................

March 19, 2001

"We just purchased a home with an FHA loan and the seller did not disclose many problems…The roof leaks, the toilet is falling through the floor…FHA inspected the house before we moved in, and they will get the house if we default and move out… We thought FHA protected first-time homebuyers from this sort of thing. How do we get FHA to accept its responsibility to us?"

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.