The home that Frank and Shannon Sinigaglio dreamed of owning has turned into a money pit that they can’t afford to fix–and can’t sell because it isn’t worth what they paid for it.
They bought the house in Penns Grove, N.J., two years ago for $85,000 with a mortgage backed by the Federal Housing Administration. But the house proved to have a faulty foundation, leaky roof, termite damage, a bathroom with no electricity, leaking sewage gas and a poorly draining shower.
Yet the appraiser, who reviewed the property to ensure it was worth what the couple paid for it, never mentioned any defects, according to the Sinigaglios.
Earlier this month, Housing and Urban Development Secretary Andrew Cuomo offered new rules designed to prevent that from happening.
Within two or three months, the department will begin requiring appraisers to do a more thorough survey of the physical condition of houses being purchased with an FHA-backed mortgage. They will be required to disclose any possible defects to home buyers and recommend that the buyer hire a home inspector for a more thorough evaluation if a significant problem is discovered.
Now inspectors are only required to appraise the property for value.
“The thorough appraisals that HUD will now require will help prevent American families from paying too much for their dream house or from buying a house with hidden problems,” Cuomo said.
The government and home buyers will also be able to prosecute appraisers who conduct fraudulent appraisals with potential civil fines of $5,000 to $10,000 or criminal penalties of up to five years in jail.
“If you are defrauded you will have a weapon you never had before,” said Cuomo.
Only home buyers who purchase houses with FHA-backed loans will be affected by the new rules. There are about 800,000 of those a year. But Cuomo is hoping the new rules will set a standard that will be followed by other lenders.
The FHA was founded in 1937 as the nation dug itself out of the Depression. It offered the first 30-year home loan, an invention that made home ownership available to more Americans. The FHA doesn’t actually issue loans but backs them in case of default.
While FHA loans continue to be relatively expensive, they allow many first-time buyers and lower-income Americans to enter the market because they require lower down payments than other loans.
In addition to the new rules for appraisals, Cuomo said the Department of Housing and Urban Development will begin using private companies to sell the 50,000 FHA homes that are foreclosed on each year. Cuomo thinks that will help houses sell faster, before they fall into disrepair.
“Government doesn’t do this well,” he said.
