The reverse mortgage program is no stranger to change. For years it has weathered repeated guideline revisions from the U.S. Department of Housing and Urban Development.
All of this change has been meant to improve the program to better meet the needs of America’s seniors – and to prevent its drain on the Mutual Mortgage Insurance Fund, thereby ensuring its sustainability.
But the adjustments have still been tough for lenders, who are constantly struggling to adjust processes in order to keep up with new regulations.
The latest mandate, which requires a second appraisal on select HECM loans, has the industry abuzz with speculation as to just how impactful the requirement will be. Will turn-times slow down? Will the loan be more expensive for most borrowers?
News of the rule came earlier this month when the Federal Housing Administration announced it would be requiring a second appraisal on reverse mortgage loans that have been flagged by its system has potentially having an inflated property valuation.
As part of this guidance, new HECM loans will undergo a confidential risk assessment, which FHA will use to determine if a second appraisal is needed before the loan can be approved for endorsement.
The decision was made after an FHA assessment revealed a significant number of inflated appraisals on HECM loans.
According to FHA Commissioner Brian Montgomery, of the 134,000 appraisals inputted into its automated valuation model, approximately 50,000 (37%) were inaccurate by at least 3%.
But Montgomery also said that most of these appraisals dated back to 2008, 2009 and 2010, when the real estate market – and the appraisal landscape – was markedly different.
Some question how many appraisals are likely to be flagged when applied to current books of business.
Erik Richard, CEO of Landmark Network, an appraisal management company that services the reverse space, said there’s a good chance we won’t see too many coming back stamped for a second valuation.
“If FHA is using it to properly target where they believe they are most likely seeing inflated reports, then I don’t believe we will see a substantial number of second appraisals required,” Richard said. “They should be able to triage files and streamline this process once they work out the kinks.”
But Jim Smith, president of Property Solutions, which also operates as an AMC in the space, said he thinks the likelihood of seeing a significant number of appraisals flagged is high.
“I think the percentage might be pretty great, considering the fact that they decided to make this announcement. I don’t think they made that decision lightly,” Smith said. “We’ll see what happens, but I’m going to guess that we’ll see a pretty good percentage come through the second appraisal process.”
For its part, FHA isn’t giving anything away. The agency said it will not disclose the factors it will use in its risk assessment, viewing its methods as “proprietary and confidential,” leaving us with no clear sign as to how particular its process will be.
When a loan is flagged for a second appraisal, it remains unclear how much this will increase turn-times and how much will it cost the borrowers who have to foot the bill.
Right now, the review process will be largely manual until FHA automates it, which it expects to do by December 1.
Until then, lenders will upload their loan into FHA Connection and can expect to hear back in about three days, FHA said.
Roger Beane, CEO of AMC LRES, said the second appraisal’s effect on turn-time really depends.
“The overall loan process time might be slightly extended for any loan flagged by FHA as needing an additional valuation,” Beane said. “As with all valuations, turn-time for an individual appraisal would depend on the location and complexities of the specific property.”
Richard said lenders should probably expect some delays.
“No question, approval will cause some short-term delays. FHA is currently promising three days – add that onto any internal processing time and closing preparations,” he said.
Richard said things are likely to improve drastically when the automated system is put into place.
“When the new technology is deployed, it should be instantaneous if it’s designed like Fannie Mae’s Collateral Underwriter,” he said. “We will all breathe a sigh of relief when the automated technology is launched.”
As far as the additional cost of a second appraisal, Smith said borrowers might incur an extra $500-$750, depending on their market and location, which could be tough for some.
“If you’re doing a HECM, you’re doing it for certain reasons, to access the equity in your property to live because you don’t have a lot of excess cash reserves on hand,” Smith said. “I’m concerned about the additional fees that might be passed on to one of those borrowers.”
Moreover, the properties that are likely to require a second appraisal may be more complicated, and complicated properties come with higher fees.
“We are more likely to see second appraisals required on complex properties or challenging assignments where the fees are already elevated,” Richard pointed out.
Smith said FHA could have considered other options that would be faster and less expensive.
“If you look at other markets that want a second opinion of value… they will take an appraisal, give it to licensed appraiser in that market, and they will do a desktop valuation on it and assess that collateral and that value. It is considered an appraisal, but you’re only talking about $125 or so and a two-day turn-time,” he said
“It would be nice if FHA would consider the alternative valuation products in the marketplace other than a full-blown appraisal, because those can be expensive,” Smith added.
The second appraisal rule went into effect October 1, and FHA has promised to monitor the rule to determine just how effective it is.