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HUD: Reverse mortgage second appraisal rule affecting about 20% of HECMs

Panel gives update on impact of recent HECM program changes

The latest mandate requiring a second appraisal on select reverse mortgage loans has affected about 20% of HECM appraisals so far, according to representatives from the Department of Housing and Urban Development.

Speaking at a panel before attendees at the National Reverse Mortgage Lenders Association’s annual meeting in San Diego on Monday, Cheryl Walker, HUD’s director of home policy valuation, said the rule has not affected the majority of HECM transactions.

“These new requirements are only impacting somewhere in the area of 20% of transactions that are submitted to FHA,” Walker said. “So 80% of our business is essentially business as usual.”

Walker said the results of the second appraisals were mixed so far, with one-third coming in above the initial appraisal value, one-third coming in at less than the initial appraisal value, and one-third coming in about the same.

She said that in the cases where the second valuation came in lower than the first, the difference ranged from 5 to 30%.

HUD Deputy Assistant Secretary Gisele Roget said the agency put a tremendous amount of research and thought into its decision to implement the second appraisal rule, which went into effect Oct. 1, 2018.

Under the new rule, lenders must submit their appraisals to the Federal Housing Administration for a collateral risk assessment. The evaluation is proprietary – the mechanics of which HUD will not disclose – but it is designed to detect a potential inflation of value, in which case a second appraisal is required before the loan can move forward.

“This was a decision that was not entered into lightly, but it was a decision that was absolutely necessary in order to preserve the program for future borrowers, and to avoid us having to raise premiums, which would impact all seniors,” Roget said. “It allowed us to avoid further lowering PLFs.”

Roget said the FHA recognizes that a second appraisal may lead to additional costs for the borrower, but that it was not something that could be avoided.

“Everyone knows that raising costs on a program that helps seniors age in place is a very, very difficult decision,” Roget said. “But because we are required to ensure that this product will not cost U.S. taxpayers and the U.S. government money, we have to make these decisions.”

During the panel, Walker also presented data reflecting the impact of reverse mortgage program changes made in 2014 and 2017.

In 2014, the FHA instituted a financial assessment of reverse mortgage borrowers, imposing either a partial or full mandatory life expectancy set-aside for borrowers who were determined to be at risk of defaulting on their loans by not paying property taxes or insurance.

And in 2017, the FHA reduced principal limit factors and adjusted mortgage insurance premiums in what has become known as the 10/2 changes, moves that were designed to prevent the program’s continued drain in the Mutual Mortgage Insurance Fund.

Walker said HUD continues to monitor the effects of its rulemaking.

She said that of the 45,453 HECM loans that were endorsed in fiscal year 2018 up until August, 13.65% had a fully funded life expectancy set-aside, or LESA. She also said that 0.03% of loans had a partially funded LESA, while 1.03% of loans had borrowers who opted to voluntarily put a LESA in place.

Finally, Walker said that as a result of the changes, PLFs had reached an average 55% as of August this fiscal year, down from 59.7% in 2017.

“We recognize that these changes represent changes to your business operations and it’s a learning curve for all of us,” Walker said. “We continue to monitor the impact of [Financial Assessment] requirements and life expectancy set-asides to determine whether or not those changes are having a positive impact on our program.”

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