FHA Appraisals Turn Nightmarish for Families

WASHINGTON —  There’s little holiday cheer this season at the homes of Lori and Myles Kehs and Robert and Kathleen Clogg.

Although they’ve never spoken with one another and live hundreds of miles apart--the Kehses in Orefield, Pa., near Allentown, and the Cloggs in Chesterfield Township outside Detroit--they share the same dilemma.

Both couples purchased their first homes about a year ago using Federal Housing Administration mortgages. After they moved in, both discovered that the appraisers who valued their homes failed to report flagrant structural, electrical and other health and safety hazards.

Both now face huge repairs they can’t afford--at least $57,000 in the Kehses’ case, between $35,000 and $40,000 for the Cloggs.

Worse yet, both couples have been approached by contractors and lenders this year with promises to get the money they need by milking other FHA programs--fix-up loans that will put them deeper in debt.

If the Cloggs’ and Kehses’ experiences were unique, they wouldn’t draw national attention. But housing experts say that hundreds of unsuspecting first-time buyers around the country are falling into the trap that snared the Cloggs and the Kehses:

FHA appraisers who apparently “see no evil and speak no evil” when they evaluate houses with potentially costly defects.

The problem is so serious that, for the first time ever, the investigative arm of Congress--the General Accounting Office--is conducting simultaneous national probes of the FHA’s two major home-improvement loan programs and is studying the performance of FHA appraisers in general.

The GAO appraisal study is expected to be the focus of congressional hearings next year.

Secretary of Housing and Urban Development Andrew Cuomo has directed FHA offices nationwide to review 10% of all FHA property appraisals to determine their accuracy.

Cuomo also warned FHA lenders that they face civil penalties if they fail to guard against inaccurate appraisals on FHA-insured mortgages.

The Kehses and the Cloggs, and several other families with appraisal complaints, contacted this reporter after failing to get a response from FHA authorities and other public officials. Their experiences should be a warning to anyone considering FHA financing, particularly as a first-time purchaser.

After a six-month search, Lori and Myles Kehs settled on what they called their “dream home” in the Lehigh Valley of eastern Pennsylvania. The four-bedroom farmhouse on nearly an acre in Orefield cost them $68,000.

The appraisal for the loan noted no problems with the foundation, no dampness in the basement, no electrical wiring problems, no troubles with the septic system. The house “conforms to [FHA] standards,” according to the appraisal submitted to fund the loan.

But shortly after moving in with their infant son and 5-year-old daughter, the Kehses began what Lori now calls “our nightmare.” For starters, the basement flooded every time she washed clothes or turned on the dishwasher. They later learned the house needed an entire new sewage system.

The house also had numerous electrical code violations that should have been obvious to any real estate professional. There was exposed well-pump wiring running from the well through the yard into the house.

Virtually every room contained unsafe electrical wiring, according to a subsequent inspection documented on videotape. Dangling, exposed cable fed one exterior light. Electrical sockets were located in the floor directly under hot-water radiators and windows.

Three bedrooms had only one electrical outlet apiece, used either for a single lighting fixture or to feed jumbles of extension cords.

The house’s foundation “has been crumbling for an extended period,” according to a private FHA property-inspection consultant, James Hawthorne of Elmer, N.J. The chimney is cracked. The grading is sloped so that rainwater funnels to the Kehses’ basement from neighboring yards. An addition to the house “is not and never was properly tied into the main house,” according to Hawthorne.

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Basic FHA minimum property code items of great importance in a house with toddlers afoot--like missing stair rails--never were identified in the appraisal. Nor were bad subflooring through much of the house, extensive insect damage to porch supports and the lack of heating, electrical power and insulation in rooms counted as interior living space for purposes of valuation.

The list of problems--and FHA standard violations--at the Kehses’ house is long, according to Hawthorne. One estimate the couple received earlier in 1997 to fix the place up--not including the costly work necessary on the foundation supporting the house--was $57,000. That’s 84% of the original house price.

Contacted by phone, the Kehses’ appraiser declined to comment. Lori Kehs, who said she and her husband are “overwhelmed by what it will cost just to make this house safe for our kids,” has written letters and phoned FHA officials in Philadelphia--and has yet to receive a response.

Robert and Kathleen Clogg--parents of children ages 3 and 4--closed on their four-bedroom $102,700 ranch-style home in Chesterfield Township outside Detroit about 15 months ago.

The appraisal supporting the FHA mortgage reported that the home had “received adequate care and maintenance” and identified “no adverse environmental conditions that negatively affect the value of the property.”

Kathleen Clogg recalls asking the real estate broker representing the seller whether an inspection was needed. The broker, according to Clogg, said an inspection already had been performed. The clear “implication was that we’d be wasting our money to have another,” she said. The subsequent appraisal seemed to back that up: It came through at $103,000--$300 more than the price on the Cloggs’ sales contract.

But the reality was starkly different. The appraisal had missed a long list of problems identified and photographed in a subsequent inspection, beginning with unstable and rotted floors, a damaged roof, malfunctioning heating system, exposed electrical wiring running along the ground in the yard and temporary floor jacks supporting portions of the house.

Just to make the house usable, the Cloggs say they had to replace 18 floor joists as well as half of the flooring. The Cloggs also discovered that, although the appraiser had indicated that the home was built in 1971, it was actually built in the 1940s, used as military housing and moved to its current site in 1971.

Sometime in its history, the Cloggs learned during an inspection, the house had suffered a fire, leaving damaged beams and scorched insulation in the attic. The house also was found to contain asbestos in several places--highly worrisome for the parents of small children who both have asthma.

The Cloggs’ appraiser has an unlisted phone number and could not be reached for comment.

The Cloggs outlined their problems in a registered letter sent to the head of single-family home mortgage production for FHA’s Detroit office, but never received a response.

In the meantime, the Cloggs were approached by a consultant specializing in FHA home improvement financing. Kathleen Clogg says the consultant assured her that he could “get us an appraisal of $130,000 on the house that we paid $102,700 for and that we knew was worth less.” The higher value would enable the Cloggs to borrow more money, and to use the proceeds to do their repairs.

She recalled in an interview: “I thought to myself, ‘I can’t accept a fraudulent appraisal on top of the one we’ve already paid for.’ ”

The Cloggs estimate that they’ve already had to pump $15,000 into the house to repair the floors and other problems and face additional thousands in future costs. They’d like to file suit or start arbitration proceedings against just about everybody in the transaction to recover their losses, but they worry about how they’ll come up with the money to pay the lawyers.

The whole subject of their finances and their troubled home purchase is also putting a strain on them individually, and as a married couple.

“I can’t tell you the emotional pains this has caused us,” Kathleen Clogg said. “The house is a shell. It needs to be totally rebuilt, but we don’t have the money to do it. It’s gotten to the point where we’re so upset that we can’t even talk about it with each other anymore.”

Situations like the Cloggs’ and the Kehses’ can be found among recent FHA home purchasers virtually anywhere in the country, according to housing inspection and appraisal industry experts.

The General Accounting Office is expected to present a report to Congress early in 1998 on its investigation into FHA appraisals. Congressional hearings are likely to follow.

In the meantime, here are three pieces of practical advice for anyone contemplating an FHA home purchase:

First, be aware that the agency’s appraisal practices are under investigation; second, hire an independent inspector to examine the house before you close, and finally, based on the experiences of the Kehses and the Cloggs, don’t expect any sympathy--or action--from FHA offices if you complain about a bad appraisal.

Distributed by the Washington Post Writers Group.