The Cloggs, parents of children ages 3 and 4, closed on their four-bedroom, $102,700 ranch-style home in Chesterfield Township near Detroit with the help of an FHA mortgage. The appraisal supporting the loan said 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," 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.

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.