The Federal Housing Administration fully automated the second-appraisal process for reverse mortgage lenders on Friday, a move it had promised would come by December 1st.
In September, the agency announced it would be requiring second appraisals on select HECM loans that were flagged in its system as having potential bias.
Since then, lenders have been required to upload loan information into FHA’s Electronic Appraisal Delivery system and wait one to three days for a response, although several lenders said turnaround was happening quickly, sometimes in less than 24 hours.
Now, HECM lenders will enter their loan data into FHA Connection and receive an immediate, automatic response on whether or not a second appraisal will be required before the loan can proceed, curbing some concerns about how much time a second appraisal would add to the loan process.
Regardless of whether the second appraisal comes back higher or lower than the first, the second appraisal must be entered into the system and the lowest of the two valuations will be used, the FHA said.
When the FHA put the second-appraisal rule into play, Commissioner Brian Montgomery said the agency opted to take this measure after an assessment revealed an appraisal bias on 37% of the 134,000 reverse mortgage loans it analyzed.
Even though most of these loans were originated between 2009 and 2010 – when the housing market and the appraisal industry were markedly different – the agency opted to set rules in place on an “interim basis” to help catch inflated appraisals, calling the rule the least impactful of potential reverse mortgage program changes the agency considered.
In a call with reporters recently, Montgomery revealed that so far, the system was flagging about 22% of HECM loans for a second look, saying that this figure was “a little less than we originally estimated.”
The agency said it will reassess the ruling at the one-year mark to determine if it is effective.
In the meantime, members of the HUD Issues Committee within the National Reverse Mortgage Lenders Association are tracking lender data to assess its impact.
“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,” said Committee Chair Elly Johnson, COO of United Northern Mortgage. “We are tracking what we think are key elements to see if we can’t figure out where some of the problems may lie.”