Members of the HUD Issues Committee within the National Reverse Mortgage Lenders Association are taking a deep dive into the Federal Housing Administration’s second appraisal rule for select HECM loans.
Speaking before a crowded room at NRMLA’s annual meeting in San Diego on Sunday, members of the committee presented their findings based on the data it has collected so far in an attempt to better understand the FHA’s methods.
The new guidance, which requires lenders to submit their appraisals to the FHA for a collateral risk assessment before they can proceed with origination, went into effect on October 1.
During a separate panel at the conference, representatives from the Department of Housing and Urban Development said the rule was affecting about 20% of HECM loans so far.
HUD Director of Home Policy Valuation Cheryl Walker also revealed that of the appraisals that were flagged for a second valuation, one-third were coming in above the initial appraisal value, one-third were coming in at less than the initial appraisal value, and one-third were coming in about the same.
But, in spelling out the rules for lenders, the FHA has been very clear that its methods are proprietary and that it will not share what processes it is using to determine if a second appraisal will be needed.
The HUD Issues Committee has stepped up in an attempt to clarify the rule change and perhaps shed some light on the what elements of an appraisal will trip the FHA’s system.
“We put together a working group to go through the mortgagee letter and try to see if we could start collecting data to make sure we were all aware of what the requirements were,” said Committee Chair Elly Johnson, COO of United Northern Mortgage.
“HUD has said they will review these requirements at six and nine months, so we want to make sure we have data available so when those timeframes come up, we can get in front of them and be able to talk to them about what we’re seeing from our perspective,” Johnson added. “We are tracking what we think are key elements to see if we can’t figure out where some of the problems may lie.”
Johnson said the committee is collecting data on appraisals from lenders that includes date submitted and received, property type, location and product type.
Committee member Jim Cory of Live Well Financial said it collected data on 245 appraisals from about five lenders, and that 61 – about 25% – were flagged.
Of those properties on which it received data, 82% were suburban and 93% were single-family residences. Cory said fewer of those properties were getting pinged.
“Suburban is coming in about 20% and urban and rural are coming in about 40-50%,” Cory said. “I think rural is the biggest area [of concern].”
While the committee only had 12 appraisals in its dataset that were for manufactured homes and two- to four-family residences, the rate of recall for those files was high, coming in at 83%.
The committee is also tracking the type of loan attached to the appraisals that are flagged, which would be either a traditional HECM, a HECM for Purchase or a HECM-to-HECM refinance.
“There was some concern that FHA would be focusing on HECM for Purchase and HECM-to-HECM refis, but it doesn’t appear that way,” Cory said. “They are actually coming in low.”
In terms of location, Cory said its data revealed the highest percentages in Florida (38%), Texas (25%) and California (16%).
When asked to speculate as to what method the FHA might be using in its collateral risk assessment, panelists agreed it was likely an automated valuation model.
“It looks like there might be some type of algorithm on the AVM,” said Kendra Rassmussen of American Advisors Group. “On just the data that we’ve been able to gather behind the scenes, it looks like…it’s hitting at anything with over a 9% variance. But then, there have been some where it was over a 9% variance but not hitting the max lending limit, and those ones didn’t trip, so we’re closely monitoring it.”
Cory said that the maximum claim amount appears to be an important factor.
“We have seen a few [flagged appraisals] that were significantly over the maximum claim amount of the FHA HECM loan limit, which is a little disappointing,” he said. “We’ve seen a couple of them that were in the million-plus range, so don’t be surprised if you get one of those [flagged].”
Johnson said in the end, it’s hard to know exactly how the FHA is completing its assessment, but that the committee will do all it can to stay on top of it.
“I believe that this model that they’re using is taking certain data points and maybe there are some triggers they’re looking for and that’s what’s kicking it out, but in the end it’s a guessing game here and we don’t know for sure,” she said. “The working group will continue to do as much work as we possibly can to get information out to you to make sure everyone understands the new process and what is required.”