What the FHA appraisers don't mention can be costly 2 couples discover woes after moving in

Nation's Housing

December 07, 1997|By Kenneth R. Harney

THERE'S LITTLE holiday cheer this season at the homes of Lori and Myles Kehs and Robert and Kathleen Clogg. The Kehses in Orefield, Pa., and the Cloggs in Chesterfield Township outside Detroit share remarkable similarities.

Both couples purchased their first homes about a year ago. Both are raising two young children, ranging in age from 2 to 6 years. Both bought their homes using Federal Housing Administration (FHA) mortgages. After settlement, 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. 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.

Housing experts say 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, 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.

Here are the two couples' stories, beginning with the Kehses': 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, 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 a new sewage system was needed.

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 wiring, according to a subsequent inspection documented on videotape. Dangling, exposed cable fed one exterior light.

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. 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 or insulation in rooms counted as interior living space for purposes of valuation.

One estimate the couple received earlier in 1997 to fix the place up -- minus the costly work necessary on the foundation supporting the house -- was $57,000. That's 84 percent of the original house price.

The Cloggs -- parents of children age 3 and 4 -- closed on their four-bedroom, $102,700 ranch-style home in Chesterfield Township outside Detroit 15 months ago, using an FHA mortgage. The appraisal supporting the loan 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," Mrs. Clogg 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.

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