What the New Appraisal Rules Mean for the Reverse Mortgage Industry

After the changes to the Home Equity Conversion Mortgage’s appraisal process took effect earlier this week, reverse mortgage professionals are anticipating what they might mean to the industry.

Last week, the Federal Housing Administration announced that all HECM appraisals will be subject to a proprietary collateral risk assessment. If the results suggest the first appraisal was inflated, a second appraisal must be ordered, and the lesser of the appraisals must be used. By December 1 at the latest, FHA hopes to have the process fully automated.

As the government attempts to alleviate the HECM’s deleterious effect on the Mutual Mortgage Insurance Fund, FHA commissioner Brian Montgomery told reporters Monday that this solution was the least disruptive of many prospects.

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Industry experts have had the last few days to reflect on the potential results of this new rule — and concerns have been raised about the potential slowdown of the appraisal process, the accuracy of automated valuation models (AVMs), and the general outcome of this solution.

Erik Richard, the CEO and founder of Landmark Network, an appraisal management company that oversees some HECM appraisals, told RMD he supports FHA’s efforts, but is unsure appraisal inflation will decrease more than it has in the last eight years.

Montgomery said Monday that FHA reviewed 134,000 HECM appraisals with an AVM program, revealing that about 37% of appraisals were at least 3% over-valued. Some of the loans reviewed were from 2008 to 2010 — a period when appraisals were estimated to be 30% too high or more.

HUD responded to the problem with the “Appraisal Independence” initiative laid out in Mortgagee Letter 2009-28  and enacted in 2010. That rule, which barred mortgage brokers and other commission-based lender employees from the appraisal process, led more wholesale reverse mortgage lenders to require the use of appraisal management companies to ensure that appraisals were FHA-compliant. Since then, Richard said, appraisal inflation has decreased substantially.

“Appraisal Independence was instituted in 2010 to address this very problem, [and] based on the data shared by FHA, it worked,” Richard said.

In general, Richard said he is cautious about relying on the accuracy of AVM programs.

“AVMs can be a great tool, but I would tread very carefully around shifting significant policy based on those results,” Richard said.

Sarah Young, the vice president of reverse mortgage operations at Resolute Bank, agrees that AVMs are not foolproof.

“AVMs are a challenge because they assume similarity based on data — that may or may not be accurate — which doesn’t factor in the nuances of homes, such as remodeling, upgrades, below-grade GLA [gross living area], accessory dwelling units (ADUs), proximity to environment, or noise hazards, such as busy roads, ” Young said.

Another concern is the slowdown of the appraisal timeline. Currently, the process takes about five to 14 days depending on location and availability of an appraiser. This timeline will extend for a second appraisal, with an estimated three days for the collateral risk assessment and then time for a second appraisal, if necessary.

“In the short term, we will see minor delays as we wait for manual results,” Richard said. “However, we believe the number of loans affected by second appraisal requirements should be minimal — in those cases, it may add a 10 day-plus delay to each transaction.”

Young said she also wonders if the second appraisal process could result in some case transfers, in which borrowers seek a better appraisal with another lender.

“Should a borrower be unhappy with accepting the lower of two values, if another lender has the ability to order an additional appraisal — or two — why would they remain with the lender whose hands are tied?” she said.

As Montgomery said earlier this week, the new appraisal rules will be reviewed periodically over the next year to see if they have the desired effect on shoring up the Mutual Mortgage Insurance Fund, and Richard said he looks forward to contributing to the FHA appraisal conversation and “increasing the effectiveness of this effort.”

In general, Young said more time will be needed to determine the true effects, and to see if the industry will find ways to work through “appraisal discrepancies to limit the variance between opinions of values.”

“But I am concerned that by accepting the lower of the two values, we may be looking at situations where borrowers that are either short to close or [nearly] short to close are required to bring in additional money — which could impact volume,” she said.

Written by Maggie Callahan

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  • Two issues were not discussed. The first is the most significant. This appears to be the first Mortgagee Letter with a sunset provision. It is my belief that the ML will terminate by sunset alone.

    Secondly, there is absolutely nothing showing that a small portion of HECMs having their home appraisal values reappraised will have any effect on the assumptions of the actuaries both within and outside HUD.

    If this helps reduce any fiscal 2019 MMIF losses on the FYE 9/30/2019 new book of business, it will be marginal at best.

    With just 363 days left until fiscal 2019 ends, we have almost eight months to collect applications including case number assigned to make fiscal 2019 a better year for endorsements than fiscal 2018.

  • “By December 1 at the latest, FHA hopes to have the process fully automated.“ Why do we just get blindsided by FHA? Why not get this system in place and implement this on December 1st?

  • Twelve States are “non-disclosure” States so sales are not required to be disclosed. It’s undeniable that software algorithms are making more and more of our decisions in almost all facets of our daily lives. Garbage in, garbage out.

    Not only will this add a lot of stress and emotion to seniors lives, this new rule is going to make the process sloppy and waste a lot of consumer’s time and money. The seniors who are forced to be the “early adapters” of the new rule are guinea pigs who’s money will be lost as the FHA fine-tunes the process.

  • I am particularly concerned about the effects on properties in rural, unique, slow, or very diverse markets. These types of areas are always difficult to appraise, and therefore difficult to find qualified, acceptably priced appraisers with reasonable turn times. These market are also the most difficult to analyze with AVMs. It is likely that the FHA collateral review process will unfairly weigh most heavily on these challenging market areas, resulting in more “fail” results. It is also likely that as appraisers get “fail” results from the collateral review, they will face consequences from the AMC – possibly reduction in assignment priority or being kicked out of the assignment pool altogether. This will reduce the pool of geographically competent appraisers in the challenging market areas, further impacting the quality, price, and turn times expected.
    Further, many of these challenging markets are also lower value and lower income. Meaning, these folks can’t afford a second appraisal. Often, it is a hardship just to afford the first!
    Once again, the program has become less available to those who can be most benefited.

  • It sounds like the actual purpose of the two-appraisal method is to apply some unwritten pressure on appraisers and underwriters to “keep it down.” And not necessarily “keep it accurate.”

    Will there be reviews conducted by the FHA to “rate” appraisers? If an initial appraiser is “overturned” and determined to require the “second opinion” of the second-appraisal, will that initial appraiser be deemed an “under-performing” individual? This system could unfairly “flag” specific, individual appraisers as being a “bad appraiser.”

    Obviously, also, this could unfairly (to the borrower) generate deliberately low appraisals by appraisers interested in “playing it safe” with low bottom line figures on their appraisals.

    A similar situation for the underwriters.

  • “AVMs are a challenge because they assume similarity based on data — that may or may not be accurate — which doesn’t factor in the nuances of homes…”

    I provide clients with comps and 3 automated data sources (AVM, RPR, Zillow) when valuing their home. It’s not unusual to see discrepancies of over $100,000 – even just between automated sources!

    The overwhelming majority of RM properties I sell are in need of complete rehab including replacement of plumbing, electrical, HVAC, etc. Yet only a few years earlier they got an appraised value that would indicate a much better maintained property.

    Lowering the PLFs purportedly was to ensure the borrower had more equity at the end of the loan, but may just be an additional way to mitigate risk without having to raise the MIP or lower appraisal values to where they should be.

    • “I provide clients with comps and 3 automated data sources (AVM, RPR, Zillow) when valuing their home. It’s not unusual to see discrepancies of over $100,000 – even just between automated sources!”

      I have been doing the same thing for years, in addition to including the property tax assessment, and could not agree more with Lawrence’s point.

      While the prospect of a second appraisal is daunting, and arguments abound about why it is unlikely to address the problems with the MMIF, let’s be thankful that FHA has not mandated that the lower of the first appraisal or their AVM value be used!

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