The Federal Housing Administration announced Friday that it will require reverse mortgage lenders to provide a second property appraisal on loans flagged by FHA as potentially having an inflated property valuation. The requirement will take effect Oct. 1, 2018.
As part of the guidance, new HECM loans will undergo a risk assessment, which FHA will use to determine if a second appraisal is needed before the loan can be approved for endorsement.
Lenders will not be allowed to close a HECM until the collateral risk assessment has been performed and, if needed, a second appraisal is completed.
The fees associated with the second appraisal will be rolled into the loan’s closing costs, and most importantly, lenders will be required to use the lower of the two appraised values.
FHA said the move is intended to reduce risk to the Mutual Mortgage Insurance Fund, ultimately ensuring the long-term sustainability of the program.
“The financial soundness of FHA’s reverse mortgage program is contingent on an accurate determination of a property’s value and condition,” FHA said in a press release. “The property value is used to determine the amount of equity that is available to the borrower and it is also used by FHA to determine the amount of insurance benefits paid to a mortgagee.”
The National Reverse Mortgage Lenders Association issued a statement praising FHA’s move.
“This is a step that has become necessary due to HUD's analysis of appraisals on properties subject to a HECM,” said NRMLA President and CEO Peter Bell. “It is a logical step to address the concerns they've identified. We appreciate that they've chosen to implement this, while avoiding any decrease in Principal Limit Factors or increase in Mortgage Insurance Premiums.”
Unlike the HECM program changes issued last October, FHA’s latest mandate was not entirely unexpected.
In July, FHA Commissioner Brian Montgomery alluded to problems on the appraisal side of the loan process.
"We have spent considerable amount of time over the last 30 days, including we locked ourselves in here for almost five hours, and we were triaging the HECM portfolio, looking for deficiencies. Looking for areas of concern,” Montgomery said on call with reporters. “There was one area where we are going to hone in on and that’s appraisals.”
“It did dawn on us that we have a higher appraisal on the front end," he continued. "Given the nature of the reverse product, where the properties tend to deteriorate more, obviously we’re talking about senior citizens, and then now the product is worth less after the life event. We’re almost maybe feeling that pain twice."
Montgomery’s comments followed an evaluation of the program by the Department of Housing and Urban Development that revealed higher-than-expected losses from the HECM program, pinpointing a negative net value to the tune of $14.5 billion.
HUD attributed part of these losses to “optimistic estimates of collateral value driven by exaggerated property appraisals when the loan was originated.”
But some question how effective these new guidelines will be in curtailing the problem.
Erik Richard, CEO of appraisal management company Landmark Network, pointed out that FHA will require lenders to accept the lower of the two appraisals, but called into question how beneficial this will be if the second appraisal comes in higher than the first.
“There are a lot of questions about how they are going to assess the collateral risk,” he said. “If it turns out that a second appraisal is needed on every file, that could be very expensive for borrowers, further driving up the costs of a program that we’ve been trying to make less expensive.”
“It’s also important to note that most of these losses took place in a very different environment than we see today, some even before appraiser independence rules went into effect,” Richard added.
Richard said it’s possible inflated appraisals are related to HECM-to-HECM refis, which have become more or less obsolete under the new principal limit factors. He said time will tell how effective the guidelines will be when applied to current books of business.
"We look forward to an opportunity to work with FHA on these requirements in the future and are open to sharing with them our perspective from the front lines," he said. “Implementing a system, which might be similar to Fannie Mae’s Collateral Underwriter, could prove to be beneficial and help move the industry forward, but we’re going to have to see how it plays out.”
FHA said it will periodically review this guidance, which was issued in Mortgagee Letter 2018-06, and may renew it beyond its Sept. 30th expiration into fiscal year 2019.