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Mandatory home inspections? Is it a structurally sound idea or a proposal lacking a foundation?

Mandatory Home Inspections?

Today, a number of factors are forcing banks and financial services firms to take a closer look at the property appraisal process before approving a mortgage. These factors include a rising number of foreclosures, the growth in mortgage origination fraud, and stricter industry loan review standards imposed by the secondary markets.

Yet, mortgage originations totaled about $390 billion for 1989, up 4 percent from the 1988 level. So clearly, these areas of concern have not caused lenders to shy away from home loans.

Unfortunately, the standard lender's appraisal often fails to reveal the true condition of a home or the applicant's ability to pay for required repairs on the property. This is where a home inspection conducted by a qualified professional home inspector - perhaps commissioned or required by the mortgage lender - could serve as a valuable adjunct to the appraisal.

While many buyers today commission a professional home inspection for their own protection, they are not obligated to share the results with the lender - even though the report may reveal serious defects with the property. Despite these facts, professional home inspectors are not routinely hired by lenders, and are typically called in only when a bank appraiser raises a specific property concern. In fact, the American Society of Home Inspectors (ASHI) has found that only about one out of a hundred inspections conducted by members are done on behalf of a lender. The inspector is only called in when the appraiser notes an obvious structural problem, such as a bowed wall or leaking roof. There are many other serious problems that are not as obvious and that would normally go unnoticed during an appraisal. Some examples are a failed heat exchanger, faulty electric wiring, blocked underground drainage systems, old roofs not yet leaking but in poor condition, and subtle cracks in walls that may be symptomatic of foundation problems.

Another concern is that the inspector who is called in at an appraiser's request is usually asked to perform only a partial inspection, in order to investigate one or two items, raising the possibility that other serious problems may still be overlooked. Even though such limited inspections may seem simpler and even adequate at the time, it represents short-sighted thinking. Ultimately, it is in everyone's best interest to inspect thoroughly and make sure the buyer doesn't take on more home repair bills than he or she bargained for.

We believe lenders should take control of the inspection process by making it routine. Such a move would not only ensure that the lender would receive inspection reports, but it would also help the originator consistently satisfy stricter loan review standards in the secondary markets. Mortgage lenders who elect to pay for the professional home inspection would also have a unique marketing edge, because paying for home inspection reports could be an effective selling point in attracting customers.

Professional home inspections are not new to the mortgage lending industry; they routinely commissioned by lenders holding repossessed homes. Because lenders know that repossessed homes have often been poorly maintained, they recognize that a professional inspection is necessary to determine the repairs that are needed to put the property in saleable condition.

Minimizing risk

Clearly, the inspection of a home's condition - especially for properties 15 years and older - and the evaluation of its potential demands on the buyer's finances before mortgage approval allows lenders to further minimize the risk of defaults occurring. If a professional home inspection were a routine part of the lender's mortgage origination process, more problems would be caught before they affect a home buyer's ability to keep up with the mortgage payments. The likely result would be a reduction in both foreclosures and time spent by loan collectors on financial counseling aimed at keeping the buyer in the home.

A pre-mortgage approval inspection also protects the lender's investment and its reputation in the secondary market. It can help a bank cut risk in its loan portfolio and guide lenders in making better mortgage lending decisions.

Major flaws uncovered by a home inspection are often enough to indicate that the appraised value and selling price of a house are inflated. This, in turn, can affect the size of the mortgage the lender is willing to grant. Though it's not common, members of the American Society of Home Inspectors have found houses that required more than $40,000 to repair. By conducting professional, pre-mortgage approval home inspections, the lender can more accurately determine the true market value of properties in its servicing portfolio.

The professional touch

The differences between the information obtained from a standard appraisal and a home inspection are substantial. The typical mortgage appraisal focuses primarily on square footage, property size, age, architectural style, location and neighborhood and physical layout.

A professional home inspection, on the other hand, takes approximately two hours and provides information on the home's structural and mechanical integrity. ASHI has set the universally recognized standard for what should be expected in a professional pre-purchase inspection. Such inspections should assess the central heating and air conditioning equipment and distribution systems, the interior electrical and plumbing systems, interior walls, ceilings, floors, and stairs, visible insulation, ventilation, the foundation, attic, basement, roof, gutters and downspouts, exterior wall covering, flashing and trim, primary windows and doors, and the property's surface grading and drainage.

The cost of such an inspection ranges from $150 to $500, depending on the region of the country, size of the building, its age, and any special structures or features on the property. Most inspections average $250.

Appraisers find that inspection reports make it somewhat easier to arrive at a realistic and accurate price for a specific property.

I would venture an educated guess that something major is not picked up in an appraisal in approximately one out of every five-to-ten appraisals. For instance, in one recent inspection, I discovered a chronic basement flooding problem. The appraiser never noticed it. The owner had simply rolled back the carpeting, laid down plastic sheeting to hide the problem, and covered it up again with the carpet.

Another time the appraiser did not notice that a fireplace was fake. That single oversight can affect the comparables he picks to arrive at a value for the house, inflating it by several thousand dollars.

Federal housing officials have begun to recognize the value of home inspections to verify the condition of existing properties.

In March 1988, the Department of Housing and Urban Development (HUD) recognized ASHI inspectors as qualified to conduct a variety of inspections on existing properties financed be Federal Housing Administration (FHA) mortgages. When HUD appraisers find questionable conditions, members of ASHI can be called in to perform the necessary inspections.

Previously, HUD required that its field office personnel and the more than 14,000 FHA mortgage lenders across the country hire individual licensed contractors or engineers to perform separate inspections of heating, plumbing, electrical, roofing or structural components. The new HUD policy expedites the mortgage process and saves money, because one home inspector can perform the work of five or six contractors.

"The home buyer has a lot at stake," said James Nistler when he spoke as deputy assistant secretary for single-family housing at the ASHI convention last year. "Sometimes their pockets are not deep enough to make the necessary repairs to their homes. If the expense is overwhelming, the homeowner may decide to stop making payments, and eventually the lender will foreclose."

Currently, other government housing agencies are also exploring the possibility of requiring inspections on properties insured by the government against the risk of foreclosure.

Finding quality

The demand for home inspections has risen dramatically in the last decade. And whenever demand for a service soars, there is the chance that some people may enter the business who are not as knowledgeable or competent as they should be. The American Society of Home Inspectors was formed in 1976 as a non-profit, voluntary, professional society in large part to distinguish and educate qualified inspectors and thereby provide consumers with an assurance of excelence and professionalism.

To qualify for ASHI membership, home inspectors must pass a series of tests in which they demonstrate their technical and professional knowledge. Many ASHI members have engineering, architectural or technical degrees. Others possess experience in various construction fields, or have been building contractors.

To join, an inspector must also have performed a minimum of 250 paid professional home inspections according to the ASHI standards of practice. Then, after review and a trial period of one year as a candidate, an inspector may be granted membership. Currently, there are approximately 1,900 ASHI members and candidates throughout the United States and Canada.

The ASHI standards of practice is a set of home inspection guidelines recognized as a benchmark of performance for professional home inspectors. These guidelines detail the components and procedures of professional home inspections.

Following and inspection, and ASHI member submits a written report to the client that details the general condition of a home and its components. ASHI members may not reveal the contents of an inspection report to anyone but the client without the client's consent.

ASHI members must also subscribe to the society's code of ethics. In addition, ASHI sponsors technical seminars and workshops through its many chapters, and expects its members to pursue a yearly quota of continuing education credits.

David L. Surette is president of the American Society of Home inspectors, Washington D.C.
COPYRIGHT 1990 Mortgage Bankers Association of America
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Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Surette, David L.
Publication:Mortgage Banking
Date:Apr 1, 1990
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