Written By: Joel Palmer, Op-Ed Writer
Mortgage processors and underwriters who deal with reverse mortgages may have to provide a second property appraisal in certain scenarios.
The Federal Housing Administration (FHA) announced the policy recently to reduce what it calls “appraisal inflation” on reverse mortgages, officially known as Home Equity Conversion Mortgages (HECMs). It went into effect for case numbers assigned on or after October 1, 2018 and will continue through September 30, 2019. FHA said in its announcement that it will periodically review this guidance and may renew the requirements beyond fiscal year 2019.
FHA said it needs to address the accuracy of appraised property within the HECM program. The announced cited FHA’s Fiscal Year 2018 Annual Report to Congress, which found the agency’s reverse mortgage portfolio had a negative capital ratio of 19.84 percent and a negative net worth of $14.5 billion.
“Due to the non recourse nature of the HECM, the financial soundness of the HECM program is contingent on receipt of an accurate determination of property value and property condition,” read a statement in the accompanying mortgagee letter. “The eventual recovery of the mortgage proceeds is entirely dependent on receiving a sufficient sum from the sale or refinance of the subject property.”
The U.S. Department of Housing and Urban Development released a study last year that researched whether “higher-than-expected loss severity on reverse mortgage foreclosures” could be attributed to a lack of maintenance by homeowners or inflated appraisals. One of the concerns cited in the study was that “properties securing reverse mortgages sell disproportionately below expected prices in foreclosures relative to forward purchase loans.”
The study concluded that there is a high instance of inflated appraisals at loan origination. In fact, the study found reverse mortgages, which do not need to consider the ability of the borrower to repay the loan, are associated with valuations that are up to 16 percent higher than those of regular purchase mortgages.
The reverse mortgage market has been in steady decline since the 2008 housing crisis. The industry peaked in fiscal year 2009, when nearly 115,000 HECMs were originated. In the latest fiscal year, less than 45,500 reverse mortgages were originated, the lowest number if 13 years.
The mortgagee letter explains in details the steps involved in the new appraisal process:
•FHA will now perform a collateral risk assessment of all HECM appraisals submitted.
•Based on the outcome of the assessment, FHA may require a second appraisal.
•Lenders cannot approve or close the reverse mortgage before FHA has performed the collateral risk assessment.
•If a second appraisal is required, FHA will place a Case Warning on the file. The mortgagee will be notified through the FHA Resource Center.
•If a second appraisal is not required, the mortgagee will be notified through the FHA Resource Center that they can proceed with underwriting.
•If a second appraisal is required, it must be ordered from a appraiser not associated with the first appraisal.
The reverse mortgage underwriter must use the lower value of the two appraisals to calculate the maximum claim amount.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.