HUD released a Mortgagee Letter this week announcing the validity period for appraisals used to establish listing prices for the federal agency’s REO properties. Theletter also outlines situations when a second appraisal is permitted for purchasers of REO properties utilizing Federal Housing Administration (FHA) financing.

Beginning April 1, all appraisals used to determine the listing price on an REO property owned by HUD will be valid for 120 days from the effective date of the appraisal. If the buyer is financing the purchase with an FHA-insured mortgage, a HUD REO sales contract must be ratified within 120 days of the appraisal date or the lender must order a new appraisal or an appraisal update.

This policy change will replace the current six-month validity period for REO appraisals, and is likely in response to the up and down fluctuations regional markets are now experiencing in home prices. The new validity period is consistent with the guidance that already governs appraisals used for FHA-insured mortgages – REO or not.

HUD also said that effective immediately, with the exception of 203(k) as-repaired appraisals, when a buyer is using FHA financing to purchase a HUD REO property, the list-price appraisal will remain effective for purposes of obtaining the FHA-insured mortgage.

“A second appraisal may not be ordered simply to support a purchase price that is higher than the value on the current appraisal,” HUD said. “A second appraisal can only be ordered to support a higher sales price if there are material deficiencies with the current appraisal or the current appraisal will not be valid on the date of contract ratification.”

As is the trend throughout the industry, HUD’s inventory of repossessed homes has increased significantly, as defaults and foreclosures on loans insured by FHA have grown with the agency’s expanding market share.

According to FHA’s latest monthly activity report, more than 9 percent of its single-family portfolio are at least 90 days past due.