FHA’s Montgomery: New HECM Appraisal Rules Less Impactful Than Other Changes

The Federal Housing Administration has been exploring potential options to stem the reverse mortgage program’s negative impact on the Mutual Mortgage Insurance Fund, and its leader on Monday positioned the government’s new appraisal requirements as the best of multiple difficult choices.

“We do understand that our policy changes are going to be challenging initially for some of the lenders,” FHA commissioner Brian Montgomery said on a morning call with reporters. “But the reality is that the HECM appraisal submission and assessment changes are the least impactful of the other changes that were on the table.”

The FHA on Friday announced new rules regarding Home Equity Conversion Mortgage appraisals, under which borrowers with appraisals deemed to be potentially inflated will be required to receive a second opinion from an unrelated firm. In announcing that change, the FHA cited concerns over the HECM portfolio’s economic impact on the overall MMIF, which was pegged at negative $14.5 billion in the administration’s most recent report to Congress last November.


That figure also played a major role in the FHA and Department of Housing and Urban Development’s decision to lower principal limit factors and update the insurance premium structure last fall.

Montgomery on Monday said that while he couldn’t speak to specifics about the FHA’s upcoming report to Congress, due out next month, the PLF reductions were only one tool in the administration’s arsenal for shoring up the HECM program’s finances.

“I can tell you that the changes FHA made to the principal limit factors and the adjustments to the HECM insurance premium we instated in 2017 were designed to help, but did not, and were not intended to, and will not fully solve the financial volatility of the program,” Montgomery said.

But he also offered his full support for the HECM program going forward.

“Make no mistake: We are dedicated to bringing this program to a reasonable level of financial self-sufficiency,” he said. “We fully believe that for many seniors, the HECM provides a solution to help them age in place.”

Confidential thresholds

In its mortgagee letter announcing the appraisal requirements, the FHA didn’t elaborate on the exact overvaluation threshold that will trigger a review — and officials won’t be disclosing that information going forward.

“FHA will consider its assessment methodology and the validation tools to be used as proprietary and confidential,” deputy assistant secretary for single family housing Gisele Roget said during the call. “The disclosure of the tools and the methodology could result in appraisals being adjusted to conform to these factors.”

But Montgomery did offer some clues. In a retroactive review of around 134,000 HECM appraisals against data from an automated valuation model (AVM) program, the FHA determined that about 37% were at least 3% too high. During the peak era of inflated HECM appraisals — a period that spanned from 2008 to 2010 — some properties were over-appraised by upwards of 30%, Montgomery said. And while those figures have since come down significantly, the presence of any appraisal bias was enough to prompt the change.

“Since it’s not yet zero or close to zero, we felt it was prudent to initiate this policy change at this time,” he said. “It’s hard to say exactly what that percentage will be, although we will be monitoring it daily, and we will certainly be reporting that out as we get more results.”

Nuts and bolts

Montgomery also acknowledged the accelerated timeline associated with this most recent set of HECM program changes, saying the FHA condensed what would normally have been a yearlong rulemaking process into about three months.

An automated system for submitting appraisals for review won’t be on line until a target date of December 1; in the meantime, reverse mortgage lenders and originators will need to submit the first appraisal through the FHA’s Electronic Appraisal Delivery (EAD) portal. Should FHA determine that a second appraisal is necessary, the lender and borrower should be informed within three days.

“We plan on working very closely with our partners on the implementation, and we have exhorted our partners to continue to stay in constant contact with us about this policy,” Roget said. “This is a new policy, but again, the use of collateral validation tools is truly an industry best practice. FHA using this in the reverse mortgage space is bringing FHA in line with the rest of the mortgage industry.”

Written by Alex Spanko

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  • As per the commionner’s textual statement:

    ““I can tell you that the changes FHA made to the principal limit factors and the adjustments to the HECM insurance premium we instated in 2017 were designed to help, but did not, and were not intended to, and will not fully solve the financial volatility of the program,” Montgomery said.”
    WHAT?? The PLF cuts were designed to help but DID NOT??? This is akin to a Dr prescribing a drug to help curb an illness but not working which means the medicine was not effective. Does this mean that the PLF reduction was inneffictive or was not warranted as per Mongomery’s own admission that the measures did not help? Who is running the asylum here? Is FHA going to at some point question the validity of the actuarian reports? Clearly confusion is the best term to describe what is going at HUD/FHA wrt to assesing the status/health of the HECM program. Most appraisals reports from 2009-2014 were most likely under valued as opposed to inflated. It takes 7-12 years to deterministically evaluate the performance of these Hecms at actual termination. Average lenght years in retirement is about 18 years. If the problem is that seniors tend to let the property’s condition deteriorate as they get older then this is a difficult problem to solve at origination.How about increasing the PLF but mandating that a property be brought to a C3 condition thru a mandatory repair set aside to be completed in a year? The expected economic life of the collateral should be increased by such upgrade. Even thru wear/tear on a C3 property today would probably by a C4 by the time the loan is due and payable and still demand a decent value at sale ? I dont see any other method to force a borrower to mantain the property thru the life of the loan. Just ideas

    • Abel,

      Apparently you did not read what you quoted. The quotation states that the PLF reduction was intended to help, not cure. Some cures if taken at full strength will kill the patient. We have many examples of this with radiation. Yet a combination of radiation with other actions such as surgery may be sufficient to produce remission. In this case, there is no current problem with reducing PLF over a period of years.

      Also it is not the independent actuaries who valued the HECM portion of the MMIF last year. The HUD annual report clearly states it is the responsibility of HUD to determine the value of the HECM portion and the job of the actuary to validate whether or not the value of the portfolio is reasonable. That is exactly what happened for the first time with the fiscal year 2017 HUD annual report to Congress on the financial status of the MMIF and the actuarial review of the HECM portfolio in the MMIF for fiscal 2017.

      While I feel NRMLA has no idea what to do about the MMIF, the FHA Commissioner is acting in a reasonable matter.

      What you failed to point out is that for the first time in memory a Mortgagee Letter dedicated solely to HECMs has a sunset provision. After reading that and the two test dates THIS fiscal year, it seems HUD has as much confidence in the NRMLA recommendation as I do. The sooner the ML sunsets and further MLF reduction are implemented, the safer the HECM program will be.

      • Carmine,
        Apparently you did not read the quote:
        It says the PLF reduction tried to help BUT DID NOT”. Why are you even rebutting what Montgomery said?. Obviously the PLF reduction failed in helping or reducing the issues that FHA faces.

        If you are referring to the following statement in the ML:

        “FHA will renew the requirements beyond Fiscal Year 2019 pending an evaluation of these program changes at 6 and 9 months to determine if the goals of the guidance have been met”

        As a sunset provision good luck with that. The amount or impact of any tweak to a probabilistic model such as used in the Hecm cannot be accurately evaluated till years later no matter what actuarian techniques are used. Real data (cohorts of loan level life of the loans from origination to termination) must be validated againsf the models used, to determine if real losses were impacted and accuracy of models. Have you ever read the rigourous mathematical paper on which the Hecm calculations of benefits were created? I doubt very much that Hud will not renew this rule.
        The losses to MMI fund are driven by the poor condition of the collateral at the due and payable event. Reducing PLF’s and appraised values will not change the root cause problem: the last survining borrowing senior at the latter years in the life of the loan tend to neglect mantaining the property because of a myriad of reasons specially health.Hence lower recapture of collateral value at sale foreclosure or otherwise.

      • Abel,

        You read the sentence much differently than I do.

        I look at the sentence as being compound. I divide it with the conjunction “but” while you divide at the first “and”. I believe what the Commissioner is saying is that the changes 1) “did not,” 2) “were not intended to,” and 3) “will not fully solve the financial volatility in the program.”

        I do not believe that that Commissioner is saying that the changes “were designed to help, but did not.” Admittedly, however, the sentence is very poorly constructed no matter what the meaning.

        I strongly believe that reductions helped substantially reduce the loss that otherwise have been projected for the fiscal year 2018 new book of business but have no justification for that conclusion until late November 2018 when the HUD fiscal year 2018 Annual Report to Congress on the Financial Status of the MMIF is expected to be posted.

      • Carmine,
        Lets agree to disagree. In my opinion is we had at least 3 PLF reductions and the PROJECTED losses issue has not been fixed then how we will know what the ACTUAL losses be from the book of business of 2015-2017? Actuarial science can be accurate specially if the law of large numbers apply. In the HECM formula we have variables that have a cyclic behavior over a time period of 10 yrs such as real estate home prices (appreciation). However, within the probabilistic model used in the HECM there is no stochastic variable built in for the distribution of a property condition deterioration over time for cohorts of folks over 62. At inception of the program the assumption was made that seniors would mantain their properties in a similar fashion as younger homeowners and just made it a requirement at application that the borrower must maintain the property. After 15 years of the program, it is my opinion that this premise was not necesarily true and FHA is finding out that specially for those loans that were assigned to FHA and for which the Max Claim Amount was paid, that at the due and payable event the collateral does not attract the value they expected even after assuming pessimistic home appreciation rates. In my opinion reducing the initial mca is a bandaid fix which may still backfire.

      • Abel,

        It is interesting that all you want to do is disagree. I strongly think most of what you say in your last comment is on point.

        Since the MMIF HECM results from operations is only composed of two types of results (actual and actuarial), actual results are determined at the time of actual HECM termination while actuarial results are estimates. To date most HECMs in MMIF HECM cohorts based on fiscal year of endorsement have NOT terminated; thus most of the results reflected in the HECM part of the MMIF come from the estimates of actuaries.

        So any changes that will impact actual results will only impact actuarial results to the extent that the actuaries estimate they will. We know that actuarial results are sensitive to PLFs but as to maintenance or appraisal changes, the actual impact is difficult to demonstrate; they also for now are estimates. This is not to say they will not have substantial impacts on results on terminations but is that the CURRENT issue? We may have to wait for years or even decades before evidence of the impact of these changes to actual results will be sufficient to get actuaries to include them proportionately in their estimate of results.

        The losses in the MMIF and particularly the growing average MMIF loss per endorsed HECM that has occurred in fiscal years 2015, 2016, and, in particular, 2017 are abominable. In the not too distant future either OMB, Congress, or even HUD itself will be forced to take negative actions on HECMs. Ones that will be more detrimental than lower PLFs. Some may be saying what is more negative than that? How about suspending all HECM endorsement functions until sufficient changes to the MMIF so that MMIF HECM losses seem to be under control.

  • Sampling from the years 2008-2010 for inflated appraisals seems odd since those years were at the height of the housing bubble and the early fallout. Why not sample for normative years such as 2015-2017 for a more accurate assessment?

    • I would love to know what years they used to determine the $14 billion projected loss.I’ll bet it was pre 2012 because later would not give accurate results because a lot fewer loans would be closed.

      • tryan1,

        You need to read the entire fiscal year 2017 HUD Annual Report to Congress on the Financial Status of the MMIF. The Actuarial Review on the HECM portfolio in the MMIF for fiscal year 2017 is also helpful in this regard.

    • That does seem odd since as you say those years were at the height of the bubble. Haven’t most markets recovered since then and aren’t the homes worth more now than they were appraised at in 2008-10? Maybe the problem was that the PLF’s were too high at that time. We can’t go back in time and fix the problems of the past. This is what is causing today’s shortage in the MI fund. The current PLF’s and increased MIP can’t be evaluated until the future.
      It seems that FHA is trying to correct past mistakes by making quick changes without input from the industry. You know second appraisals are not going to fix anything in the near term. What’s next?

      The future is definitely in proprietary products!

  • If the value problem has a history of growing as severe as the FHA Commissioner indicates, this change is very necessary.

    However, it is also very disappointing to read that this change was made over cutting PLFs further especially in light of the following statement: “I can tell you that the changes FHA made to the principal limit factors and the adjustments to the HECM insurance premium we instated in 2017 were designed to help, but did not, and were not intended to, and will not fully solve the financial volatility of the program.”

    Since Mortgagee Letter 2017-12 was posted 9 months before the Commissioner was confirmed by the Senate, his assessment of the intent of the authors of the ML are as valid as almost anyone’s familiar with HECMs and HUD; however, I agree with his assessment. Further, I agree with the other parts of the quotation.

    It was my limited understanding that the 10/2 changes were a Melba toast reaction to the estimate of what the projected losses would ultimately look like for the fiscal year 2017 new book of business. The purpose of the rather tepid reaction was to give some idea on the impact of any reduction to PLFs on an endorsed HECM that has gone through financial assessment.

    There is little question that financial assessment has exasperated the HECM losses that are plaguing the MMIF. This crisis will only be mitigated by further PLF cutbacks not rather minor corrections to appraisals.

  • Well said Carmine, not much you can add to that comment!

    If I had to say anything it would be that after the PLF adjustment of 10.02.17, you would think HUD would have given it ample time before making another change. One year is not enough time to measure the results of such a major change as we incurred in 2017!

    I have said this all along, the new appraisal ruling in my opinion is another way to reduce the PLF on more seniors and their homes. This may only affect a small portion of borrowers in retrospect. However, keep this in mind, every second appraisal that comes in lower than the first, even if it is $10,000 to $15,000 less, this is the appraisal that will be used. This to me is an indirect reduction in the PLF!

    Again, job well done Carmine!

    John A. Smaldone

    • John,

      We are now in the time frame when the MMIF is undergoing actuarial review not only by the independent actuaries but by those within HUD itself. Based on the language of the Commissioner, it seems the initial results for the new book of business endorsed during fiscal 2018 was not positive because the Commissioner brought out this change in the hopes of mitigating losses from the fiscal 2019 new book of endorsement business.

      No, the change from Mortgagee Letter 2018-06 (“ML”) will not be an indirect reduction to the PLFs but may result in the reduction to the Maximum Claim Amount (“MCA”) which will reduce Principal Limits without reducing their factors. It is also interesting that the ML will sunset at the end of fiscal 2019 unless extended by HUD. That says that even the Commissioner has little confidence that the impact of the ML will do much to reduce the magnitude of the anticipated average MMIF loss per endorsement in the cohort of HECMs endorsed in fiscal 2019.

      Across the board reductions to PLFs will reduce principal limits without messing with MCAs.

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