As a Direct Endorsement (DE) underwriter and the vice president of operations at Urban Financial Group, I’m often asked by reverse mortgage brokers and loan officers about appraisals—in particular, how property value is determined. For sales professionals, having a good understanding of this aspect of underwriting can actually help you improve customer satisfaction and contribute to a smoother loan process.
The Appraiser and Underwriter’s Responsibilities Both the appraiser and the underwriter have a responsibility to the FHA to provide a quality appraisal report. The appraiser performs an on-site inspection of the property and compares it to nearby sales (called “comparables” or “comps”), adjusting for any differences in amenities. The appraiser then determines an estimate of the property’s current market value, based on the adjusted sales prices of the comparables. Upon receiving the report, the underwriter is required to review and confirm that all FHA requirements have been met, the value is supported and well documented and the property is marketable.
An analysis of the supported value then falls to the underwriter. This typically includes reviewing third-party valuation systems (Automated Valuation Models, or AVMs), county records and other online research that’s readily available. If, based on these sources, it appears that the market value is lower than the appraiser’s determination, or that better comparable sales may be available, the underwriter will question the appraiser further and possibly require additional comparable sales. The DE underwriter may ultimately determine that the appraisal supports a value that’s different from the initial appraisal.
Reconsideration of Value I’m also frequently asked, “Why is the value on the initial appraisal often decreased by the underwriter, and hardly ever increased?” For the most part, property values nationwide have been steadily dropping or staying stable in recent years. So, for a product that’s so dependent on value, it’s hard for an underwriter to justify increasing the appraised value unless there’s very strong evidence of higher market value.
If you or the borrower feel that the property has been undervalued and have additional comparable sales data or other information to provide, the DE underwriter or AMC can communicate directly with the appraiser to have the new information reviewed. If the appraiser then feels the original value was understated, he or she can revalue the property. However, the FHA looks very closely at any value increases, and there would need to be substantial evidence to indicate that the initial report undervalued the property and the new value is better supported.
Unfortunately, it’s more common for the underwriter to question value. This is especially true with unique properties that have hard-to-locate comparables, properties in areas of declining markets or properties in areas where the appraiser must travel outside the normal market area. In these instances, adjustments, distances or timing of sales often fall outside of normal FHA guidelines. The underwriter must review the appraisal and make a case to the FHA for why value is supported despite these factors. If the underwriter finds that a strong case cannot be made, he or she may have to reduce value.
Overvaluations and Declining Markets With HECMs, appraisers and underwriters must be especially careful to perform adequate due diligence in valuing properties in a declining market, since the loss to the FHA (and potentially the lender) on any future claims will be heavily dependent on declining markets and/or overvaluations. This is why it’s so important to make sure marketability, value, area and declining markets are thoroughly vetted at the time of the initial loan review.
HUD Mortgagee Letter 09-09 introduced additional appraisal requirements for declining markets, defined as those in an area “that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times.” First, the appraiser must provide two comparables that sold within 90 days of the effective date of the report, and adjust for comparables that sold over the 90-day mark. The appraiser must also provide two active or pending sales that have been market-tested.
In addition to protecting the HECM mortgage insurance fund, these additional requirements help safeguard the lender from future losses. In most instances, a HECM lender will be able to file a sales-based claim and be made whole by the FHA through the Mutual Mortgage Insurance (MMI) fund. However, if the property doesn’t sell within a certain timeframe, the process changes to an appraisal-based claim, and the lender is only reimbursed at the new appraised value.
HUD Requirements for Failing to Comply Both the appraiser and the underwriter are equally responsible for the quality of the appraisal. The FHA may pursue appropriate enforcement actions against either the appraiser or the underwriter for lack of quality appraisal reports. This includes removing appraisers from the FHA roster, choosing not to insure the loan or requiring the lender to indemnify the FHA from any liability on the loan.
Tips for Originators While loan originators don’t have much control over the appraisal process, there are some key things you can do to facilitate a smooth process.
-Managing borrower expectations is essential to giving your customers a positive experience. Inform each prospective borrower up-front that an appraisal will take place, explain the process and let them know how the appraised value will dictate the amount of money they’re eligible to borrow. Make sure they know the appraisal may come in above or below their expectations and that the underwriter will determine the final appraised value so there are no surprises.
-Review the appraisal report for anything that may need to be discussed with the borrower, such as items that must be repaired prior to closing, additional access for the appraiser in order to complete the report (attic, crawl space, etc.) or photographs suggesting that the property isn’t occupied by the borrower. If value is discussed with the borrower at this time, make sure to explain that the figure may change and is not final until the underwriter signs off on it.
-Using an Appraisal Management Company (AMC) that’s approved by your company can streamline the process and usually costs no more than a normal appraisal report. The AMC not only provides compliance with HUD Mortgagee Letter 09-28 regarding appraiser independence, but also takes on a lot of the responsibility that formerly fell on the loan officer or processor. The AMC will accept the appraisal order, select the best appraiser for the job, negotiate a fee, place the order, monitor progress, audit the appraisal report once received, field any questions and pay the appraiser for the report.