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.
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