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.