MortgageReal Estate

How to manage appraisal expectations on reverse mortgages

As gap between values and expectations widens, HECM experts share tips on navigating this tricky process

Any time a homebuyer seeks an appraisal as part of obtaining a mortgage, there’s a good chance expectations won’t align with the appraiser’s verdict on value.

For older homeowners seeking a reverse mortgage loan, this can be especially challenging, as a lower-than-expected value could preclude the borrower from securing the loan if the proceeds are not going to be enough to pay off an existing lien – a requirement of the HECM.

In fact, the gap between homeowner expectations and appraisal values is widening, according to the latest Home Price Perception Index from Quicken Loans.

In January, appraisal values were an average of 0.47% lower than homeowner estimates, the index revealed.

While this difference is relatively small, Quicken’s report noted that the emerging trend could indicate that homeowners are unaware of the recent slowdown in home price appreciation, suggesting the gap could widen further as home prices continue to decelerate.

How can reverse mortgage originators best prepare borrowers ahead of an appraisal to avoid disappointment?

Manage their expectations upfront, some suggest, and if you can, visit the property yourself.

“I like to go to their house to do my initial interview and I look at the home itself with a critical eye. It’s all in the preparation,” said John Luddy of Norcom Mortgage in Connecticut. “You really should visit the house yourself and make sure nothing funky is going on. If you’re doing this over the phone, they’re not going to tell you the garage door is falling off.”

Beth Paterson of Reverse Mortgage SIDAC in Minnesota said she will suggest any needed repairs are addressed ahead of the appraisal.

“When I’m meeting with the borrowers, either for an informational meeting or taking their application, if I see some repairs that might be required, I advise them to fix them if possible prior to the appraisal inspection,” Paterson said.

Paterson added that she’ll review comps in the area with borrowers, and that she tries to wring the emotion out of the equation.

“I also review that it is based on what people are willing to pay for homes in their area, not on what we emotionally think our home might be worth,” she said.

Both Paterson and Luddy said they seek out records on the property from the city to obtain its tax-assessed value.

“In Connecticut, I can go on the town’s website and it shows me the appraised value and the assessed value,” Luddy said. “I start with the appraised value and ask the borrower what they think about that, if they are close to what the town thinks, because the appraiser is going to look at what the town has it appraised at.”

Paterson said she does the same.

“Fortunately, in Minnesota, the appraised values come pretty close to their taxed-assessed values, so this provides a good base for their estimated value,” she said.

But no matter how well you manage expectations, borrowers can still end up disappointed and want to contest the appraisal

Both Luddy and Paterson said they have had borrowers contest an appraisal, but that it happens infrequently and is only successful if the appraiser made a glaring error in his report.

Most of the time, Luddy said, appraisers are pretty accurate.

Erik Richard, COO of the Pacific Region for Class Valuation who handles the AMC’s reverse mortgage support nationwide, said it’s rare that an appraisal is contested, although it is slightly more common on HECM loans than traditional mortgages.

“Reverse borrowers contest values at only a slightly higher rate than your average borrower,” Richard said, noting that appeals on HECM appraisals hover around 1% – 3% higher than appeals on traditional loans.

“This is likely due to value challenges based on property condition and tighter lending on the lower loan-to-value reverse product,” Richard explained. “Of course, not all reverse mortgage properties have condition issues, but many may not be as newly renovated as other property sales in their markets.”

To avoid issues with the appraisal, Richard said LOs should set proper expectations and warned them to be wary of websites that offer real estate estimates.

“Online home valuation tools are getting easier to access, but as most of us know their accuracy can vary wildly based on market and property type,” he said. “In many cases these tools are a source of borrower confusion when it comes to the expected value.”

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