This spring, the National Reverse Mortgage Lenders Association invited representatives from the Department of Housing and Urban Development to share their most pressing concerns about the state of the Home Equity Conversion Mortgage program at their pair of regional conferences, and the answer was the same at both: appraisal quality, particularly for HECM-to-HECM refinances, will be high on the department’s list of priorities.
“We continue to have concerns over churning, whether the refinance provides a meaningful benefit to the borrower, and the quality of appraisals,” Federal Housing Administration official Karin Hill told the audience at NRMLA’s eastern regional event in New York City in April.
There’s just one problem: The appraisal process, especially for FHA-backed products, can be a messy one, as the various members of the loan process — underwriter, originator, appraiser — each attempt to balance their competing priorities. And too often, a clear idea of what HUD and FHA actually want out of appraisals gets lost in a years-long game of regulation telephone.
First off, a quick primer on appraisals. HUD’s guidelines on what it wants from an appraiser are delineated in the department’s Single Family Housing Policy Handbook 4000.1. Last updated in December 2016, this document is intended to supersede all other previous guidance that the department had issued on the loan process, from origination to endorsement to servicing.
While in theory this was supposed to streamline the relationship among lenders, appraisers, and HUD, the creation of a unified guide that erased previous guidelines also generated a fair bit of confusion, according to John Dingeman, chief appraiser at Landmark Network, Inc.
He gave a quick example of how these knowledge gaps can build over time. For instance, while HUD requires appraisers to inspect various parts of a home and property, one thing that isn’t on the list is an exact cost for connections to public utilities; that’s up to the mortgagee to explore, Dingeman said. But over the years, some dutiful appraisers have provided that information to lenders as a courtesy, which can often lead originators and underwriters to believe that it’s a HUD requirement — and then react negatively, Dingeman said, if a different appraiser correctly notes that it isn’t his or her responsibility.
The same thing can happen on HUD’s end, especially if the new 4000.1 handbook included a tidbit that an appraiser had happened to miss in the past, or if it gets confused with a Fannie Mae requirement that HUD does not match.
“Many seasoned appraisers say: ‘Oh, man, the 4000.1 changed everything,” Dingeman said. “Now some appraisers say: ‘I have to inspect the attic!'”
“I think HUD turned around and said: ‘What did you just say? So you haven’t been inspecting the attic?’” Dingeman said. “‘Because you know, you’re supposed to!’”
Dealing with the attention
Over at Resolute Bank, mortgage operations manager Sarah Young said she’s seen the issue from the other end.
“We wouldn’t necessarily be in the loop of something that HUD deems to be an appraiser’s issue,” Young said — even if it could end up being her company’s problem in the long run.
As appraisers and lenders adjust to the 4000.1 handbook guidelines, Young said she’s seen the crackdown from HUD firsthand, both on forward and reverse FHA loans.
“I think we’re starting to see that impact on the reverse side even more,” Young said. “The FHA appraiser is getting more focus and pressure from HUD.”
At Resolute, Young and her team underwrite their loans in house, but also analyze the underwriting efforts of their partners to see what they’re doing differently — and how their feedback differs from HUD’s responses.
“It’s so unique to see how each different lender would look at the same appraisal differently,” Young said.
Young also uses software to maximize the quality of Resolute’s appraisals, running the documents through a program called RealView from the Oklahoma City-based Platinum Data Solutions. The software provides Young and her team with detailed information about comparable properties, public records, sale prices, and other data points to help streamline the underwriting process.
Issues on the horizon
But despite this, issues remain. The use of Multiple Listing Service photos in the appraisal process, for instance, frequently raises issues, with underwriters and appraisers required to verify their accuracy against shots on up to six multiple public real estate websites such as Zillow and Redfin.
On the appraiser’s side, Dingeman said HECM lenders frequently want pictures of the property to be seasonal, balking at including a snowy photo of a home in an appraisal for a loan that’s nearing completion in the summer, thinking it could indicate that the comparable home values are no longer valid — but HUD simply doesn’t care about it.
“The lenders want it to represent that it’s current,” Dingeman said. “I’ve talked to HUD specifically, their chiefs in Washington, D.C., and they said: ‘While we would love that to be true, that’s not what the 4000.1 says.’”
Young also raised concerns about the impact that electronic appraisal delivery, or EAD, will have on the underwriting process.
“How is HUD going to use EAD as a tool to further police appraisals? That’s a question I have,” Young said.
Perhaps the simplest advice that Dingeman had for players on all sides of the loan origination process: Treat the 4000.1 as the gospel truth for HUD guidelines, as that’s what officials themselves will always cite in areas of confusion.
“If we didn’t say it, then it’s not required,” Dingeman said.
Written by Alex Spanko