FHA to Require Second Reverse Mortgage Appraisals Beginning October 1

The Federal Housing Administration on Friday announced a new appraisal requirement for Home Equity Conversion Mortgage lenders in another attempt to stem losses to the Mutual Mortgage Insurance Fund.

Starting with case numbers assigned October 1, the FHA will perform a collateral risk assessment on all reverse mortgage appraisals, then require a second appraisal if officials believe the initial figure had been inflated.

“The mortgagee must not approve or close a HECM before FHA has performed the collateral risk assessment and, if required, a second appraisal is obtained,” the administration wrote in Mortgagee Letter 2018-06. “Where a second appraisal is required by FHA and provides a lower value, the mortgagee must use the lower value of the two appraisals in originating the HECM.”


The second appraisal must be performed by a firm unrelated to the company that conducted the first one, and borrowers can finance the expenses associated with the second appraisal as part of the closing costs.

The FHA specifically cited the most recent Annual Report to Congress, which found in November 2017 that the HECM program generated an economic net worth of negative $14.5 billion. While the Department of Housing and Urban Development’s move to lower principal limit factors last year was implemented in an attempt to stem that tide, FHA on Friday said it wasn’t enough.

“Despite these changes, projected losses for the HECM portfolio indicate the need for changes to further mitigate risk,” FHA wrote in the mortgagee letter.

FHA officials will evaluate the efficacy of the new appraisal regulations six and nine months after the initial implementation date to determine if the move is achieving the goal of stopping losses.

“Due to the nonrecourse 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,” FHA wrote. “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 National Reverse Mortgage Lenders Association applauded the move.

“This is a step that has become necessary due to HUD’s analysis of appraisals on properties subject to a HECM,” Peter Bell, NRMLA’s president and CEO, said in a statement provided to RMD. “It is a logical step to address the concerns they’ve identified. We appreciate that they’ve chosen to implement this, while avoiding any decrease in principal limit factors or increase in mortgage insurance premiums.”

Shelley Giordano, chair of the Funding Longevity Task Force at the American College of Financial Services, echoed Bell’s words.

“I agree with Peter Bell that it is better to impose more scrutiny on the collateral for the loan than to reduce principal limits or increase the ongoing cost of the MIP,” she told RMD.

Written by Alex Spanko

Maggie Callahan contributed reporting.

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  • FHA just refuses to admit that the negative impact on the insurance fund is due to their own lack of experienced mortgage professionals at the agency. The problem is not values, or the PL, or the floor rate, the problem has always been treating performing loans they purchased from lenders when the balance reached the original appraised value, the same as a foreclosure. All they have to do is quit buying loans when they reach the original appraised value. Most of those properties are still worth far more than the loan balance and servicing companies would have no problem continuing to service the loans. They have a huge portfolio of performing loans but apparently nobody at the agency realizes it.

    • Per the mortgagee letter – “The cost of the second appraisal, if required, is then eligible to be financed as part of the HECM closing costs.”

      I would say that means it is expected that the borrower pays for it, which will be a tough sell. Can you imagine how that conversation will go? We need you to pay for a second appraisal, and it can only hurt the PL. We are going to have to start setting expectations for two appraisals on every HECM we originate. I see no other way to handle this.

      My concerns –

      1) How long will it take for HUD to make the decision on each appraisal?

      2) What is their methodology? Is it simply an AVM?

      3) On what percentage of appraisals will this be required?

      • Matt,

        Your first question is right on point. How much time will this add to the H4P? Imagine going back to the borrower and saying — O, yeah, remember that $100,000 you had to come up with to close, the second appraisal came up $25,000 less so you will now need $113,100 with the cost of the second appraisal.

      • Many of your questions are unanswerable due to not know the effectiveness. Which why they put review dates in. The purpose if a second appraisal is if the first has some questionable comparables. This will depend in location. Whether it be state or by neighborhood.
        Appraisals are part of the underwriting log and HUD per se does not review them. An underwriter who is FHA qualified will. There will have been specific guidelines established on top of their already strict guidelines. This is a protection for the bank and the consumer. If by over lending on too many homes another financial crisis could again cause innumerable foreclosures. This is probably a result of bad appraisers, lack of appropriate comparables and varying markets from area to area and state to state.

    • The Borrower – it can be paid for from the proceeds, so looks like HUD is classifying it as a Mandatory Obligation.

      If the second appraisal comes in lower then the first … be prepared for some extremely upset Homeowners.

    • The ML states that “The cost of the second appraisal is eligible to be financed as part of the closing costs.” Only time will tell if that will be common practice. But your underlying question is a good one – how frequently will this policy result in higher fees?

  • There is a huge issues here.

    If the 10/2/2017 changes were sufficient to bring the loss on the new book of business for fiscal 2018, would we have this change?

    The second is HUD is constantly saying that they need at least a few years to see if what they have changed is working as hoped. Now they will test twice in fiscal year 2019. What changed???

    I believe that a reduction in PLFs is coming in 2020 or 2021. All this will do is allow even more losses to accumulate causing the program to be further in jeopardy. Will Congress and the OMB ignore HECM MMIF losses forever? Is this fair to forward mortgagors whose loans are covered by the MMIF? I don’t think so.

  • My friends,

    I can’t say I am happy about this announcement, sure not much notice and no real time given for comments and rebuttals! Peter Bell and NRMLA is supporting this move, I can understand one bit of logic and that is it is better than having another cross the board PLF reduction.

    However, Has NRMLA and everyone taken into consideration that after October 1st, every loan, before it can close, must be reviewed by a Desk appraisal review board of HUD/FHA!

    First off, how much time is this going to take? This is now is another step in the process that will slow things down. As it is, reverse mortgages do not move along as swiftly as forward loans do!

    We do not know how long this process is going to take, 3 days, 5 days, a week, two weeks, we don’t know folks!!! Then if another appraisal is required, how much more time are we facing, again, we do not know. We have not been given this information!

    Also, have we all really analyzed what impact this will have on our seniors. Sure, they say a second appraisal cost can be financed into the loan, fine and dandy! What if the second appraisal comes in lower, which could knock the loan out of the box. Bingo, now the senior is out of pocket for two appraisals!!

    It is great we are not seeing a cross the board PLF reduction as NRMLA puts it, but how many appraisals are going to require second appraisals, how many values are going to be dropped and how many indirect reductions to the PLF’s will be seeing, we don’t have the answers to that, do we??

    Remember, if the second appraisal comes in lower than the first, the second appraisal is what will be used.

    For an example, if the first appraisal came in at $295,000 and the second appraisal came in at $278,000, we now have a value that will be used of $17,000 less. Guess what, the principle limit will now be based on the value of $278,000. Guess what else just happened, yup, we had a reduction in the PLF with out actually having to call it a reduction to the PLF!

    Is this a subterfuge or what??? I am generally the never ending optimistic one in my comments on our publications of the industry but in this incident, I feel I am calling as I see it and adding 2 + 2 together and coming out with 4!!

    I am not saying this is the killer of all killers but it will play havoc once again on our seniors ability to qualify for a HECM and it will eliminate another percentage of the market we once had to work with!

    We have to ask ourselves, does HUD really want the HECM survive or does it want it to go away, that is the 64,000 question??

    The HECM needs to be left alone, no more changes, I repeat myself, no more changes. This goes for HUD, FHA and NRMLA!! Enough is enough, I understood why some changes had to be made to the HECM, I also understand the trouble the fund is in. However, are there possibly other reasons for the vast losses in the fund that we are all not really aware of???

    I am not giving up on the HECM, on the contrary. There are still to many opportunities out there, plenty of equity to tap into and a lot of senior homeowners with little or no debt on their properties. This has to be our targeted market, forget where we were, the borrower we used to fill the need for are getting fewer and fewer. We MUST be aggressive, we MUST go after the higher value properties with little debt in relationship to the home value.

    Also, utilize all the new proprietary programs coming into the industry, they fill many needs for the senior homeowner that the HECM did not. Sure, you have to target the more affluent, the high valued properties and those with low debt on them. The good thing is, these prospects and senior homeowners are out there! They have a need for our product, you can bet on it!

    This is my evaluation of what has taken place, it is only my opinion, agree or disagree, it is your choice, I am only calling it the way I see it from my point of view.

    Thanks to all of you that read my comment in its entirety!

    John A. Smaldone

    • John,

      Like you imply, this is no cure for the ongoing new book of business loss situation we saw in the last HUD annual report to Congress on the MMIF. While there is real value in this exercise, its value is limited and may not substantially result in change where change is needed.

      Like others, I disagree with those who are looking for little tweaks here and there to cure a growing $14.5 billion problem.

      The biggest problem I have is that other holders of mortgages governed by the MMIF are the parties primarily responsible for HECM MMIF losses. Why should their MIP overpayments cover the losses seniors are generating?

  • Why even require an appraisal if FHA knows how to effectively do a collateral risk assesment? Why do we need an opinion of value from a professional appraiser if somehow FHA has a methodology to determine if the value is high or low? If I was a member of the Appraisers Institute I would be up in arms about this development. Just my humble opinion.

    • Abel,

      Any insurance company worth its salt requires an appraisal on property by a competent third party appraiser, it insures even though many also do an internal inspection of the appraisal to determine if the appraisal is reasonable.

      • Bram,
        I do agree but if FHA’s collateral risk assesment becomes part of the origination process then it mayb undermine the opinion of value of a licensed appraiser. FHA methodology is still unknown. Fannie Mae has CU which gives a collateral risk analysis scorecard based on 20k plus of appraisals a days it receives) but it is done for audit/secondary market transactions. Fannie technically does not insure the loan either.

    • Abel, because there are BAD appraisers out there and they STILL have to see the condition of the home. I have in my possession an appraisal of a home built in the 1950’s that has had hardly ANY updates (only basic maintenance) and the appraiser used 2 homes that were completely remodeled and updated…..AND the adjustments were not nearly what they should have been. The client was not even happy with it and now we have a 2nd appraisal because the first one expired and it came in more properly about $30K under the other one. There continues to be no proper training for appraisers and too many requirements to become one in most states.

      • Melinda,

        This is way more rare today than in the past as underwriters can check pics of those comps on Zillow or Trulia and check against pics of subject property. The rare cases I see this now a days I normally go back to the AMC and request a strong reason in wrting for using 2 or 3 comps that are superior to the subject property. You may get away with one comp if appraiser is trying to bracket but using 2 comps moves that middle point and this would mean an inflated appraisal. It is best to reject such report or have the proper comps added because the underwriter will flag it. But again if you were in business in 2004-2007 the occurence of such issues was prevalent then but very rare now.

  • I want to add that I’m highly skeptical that the 2017 PLF book of business is going to produce losses for HUD/FHA. I don’t care how many actuaries you hire to project that, as someone that’s been in this business for quite a while, I find that hard to believe.

    In addition to that, it’s hard to not be frustrated as a broker that has zero control over the appraisal process and is being told that appraisals are being inflated.

    • Matt,

      You have your opinion. The actuaries actually are considered the experts. I also believe the HECM program is in trouble and little tweaks to appraisals are insufficient to make any real difference to the losses that will be generated by the fiscal 2019 book of business.

  • ALEX, I wish the headline had not come out the way it did. It sounds like it is going to be required on EVERY HECM and that is not the case. Most of my appraisals with my AMC come out very realistic and I am truly not worried about it. I also do Forward mortgages and Fannie’s are run through an AVM everytime and I have had no issues in years. Too many people are worrying, but if you are in an area where values are all over the map and going up extremely high, you better start adding that 2nd appraisal fee in upfront.

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