The reverse mortgage industry has had to endure multiple significant changes over the last 18 months, but the arrival of a new rule that opened the possibility for a property to require a second appraisal had the potential to notably impact both lenders and borrowers.
With five months of second appraisals, the industry has taken note of an uptick in the number of properties requiring an additional appraisal, as well as some general findings about those properties.
“We are seeing a slight uptick in those cases that will require a second appraisal,” says Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association (NRMLA). “We’re not capturing all originated cases, but we do believe we have a statistically significant representative sample for what’s going on in the marketplace.”
The number of properties requiring a second appraisal increased about 6% from initial findings.
“When this was a more manual process, we saw 19 percent of cases requiring a second appraisal,” he says. “Our most recent analysis puts the current figure at 25 percent of cases requiring a second appraisal.”
When the implementation of a second appraisal possibility first entered the conversations of the industry, NRMLA initially expressed concern that it could have an impact particularly on borrowers. The fact that there is not a clear-cut scenario for the rule from the perspective of borrowers is acknowledged as a difficulty.
“First of all, the borrower impact is material,” he says. “A borrower enters into the application process, gets an appraisal, and it’s not clear to that consumer if they’re going to need a second appraisal or not. All of our members, from what I’m hearing, are advising applicants that a second appraisal may be required, but it’s just not known, and that uncertainty from a consumer perspective is not helpful.”
Still, the larger reverse mortgage industry is starting to come to more of a realization about properties that have a generally higher likelihood of encountering the requirement of a second appraisal.
“The industry is coming to understand that, through looking at our data, that there are certain property types that will have a likelihood of a second appraisal. Manufactured homes, multi-family homes and condos are seeing more frequencies of second appraisals,” Irwin shared.
The likelihood for rural homes to be hit with a second appraisal is higher because of the more scattered nature of those markets, which tightens the availability of enough comparables within close proximity to the affected properties, Irwin says.
“Also, those properties that are in rural areas are also more likely to see a second appraisal. The rural homes make sense [considering] the proximity of the comparables that may be used. The frequency of available comparables is more challenged in rural areas.”
The higher level of challenge in rural areas is felt by originators who operate inside of them, says Rich Pinnell of Guild Mortgage in Redding, Calif. Pinnell shared scenarios behind the two instances in which he was required to get a second appraisal: one of which was for a rural property that was over a century old, but the second appraisal came in on par with the first. “So, no damage,” he says.
The second instance saw the sale of the property in question 30 days before its initial reverse mortgage appraisal, but within those 30 days the homeowners made physical modifications to the property. The first appraisal came in $22,000 higher than the purchase price 30 days before.
This may have been one of the instrumental factors in triggering a second appraisal. However, the relatively limited availability of comparables to assist in the appraisal process led to the use of a nearly-year old comparable. When a second appraisal using this was submitted to the FHA, however, it could no longer be challenged.
“And it [could’ve been] challenge-able, because the appraisal used a 10-month old comp,” Pinnell says. “The first comp is supposed to be the closest in match to the subject property, which is size, age, things like that. Comp 2 was 10 months old.”
Second appraisals and the MMI fund
The second appraisal rule, as a method to stabilize the HECM program within the Mutual Mortgage Insurance (MMI) fund, could potentially be refined as time goes on when more information is available concerning its impacts, Irwin shared.
“I think over time, as we get more understanding of the impacts and the outcomes of those second appraisals, I think there may be opportunities to possibly propose some recommendations of improvement,” Irwin says. “But, we certainly see the need to understand the values. It’s not mutually exclusive to also understand that there are probably areas or aspects to the HECM program which could further bolster its performance within the MMI fund, but that being said, we understand the need for an accurate valuation.”
There could be opportunities to streamline industry functionalities that also minimize the impact on consumers, but that doesn’t mitigate the need for appraisals that are as accurate as possible, Irwin feels.
“Are there opportunities for efficiencies and minimizing the impact to the consumer? I’d have to think that yes there are such opportunities, but we understand the need for accurate valuation,” he says. “It’s not an approach we need to challenge, but we think there will be opportunities to improve on over time.”
HUD should be commended for implementing the automation process for this rule in a timely manner, Irwin says.
“I think it should be acknowledged that HUD has made indications and provided a time frame for the full automation of this process, and they were able to execute on that automation. They should be commended for that. The rollout and implementation of the different phases of this was very efficient.”
The topic continues to garner interest and will be the subject of a panel discussion at NRMLA’s upcoming Western Regional Meeting in March.