An Update on Reverse Mortgage Second Appraisals

Second appraisals on Home Equity Conversion Mortgage (HECM) transactions under the recently-extended collateral risk assessment (CRA) rule are largely unchanged from figures shared earlier in the year, though have appeared to tick slightly downward. This is according to data from a valuation professional and the National Reverse Mortgage Lenders Association (NRMLA).

“The latest data indicates that overall, for all property types combined, approximately 24% of HECMs require a second appraisal,” says Elly Johnson, president of All Reverse Pro Consulting in Atlanta, Ga. in an email to RMD. “This is consistent with what others are seeing. Some property types have a higher percentage of second appraisal request, for example manufactured homes and rural properties.”

Earlier this year, Johnson and valuation professionals reported that the rate of second appraisals observed at the beginning of 2019 floated around 26%, according to a presentation at NRMLA’s Western Regional Meeting in March. The minor difference between figures reported earlier in the year, and those that are currently being observed are consistent with observations noted by NRMLA itself, according to the association’s president Steve Irwin.

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“We haven’t noticed any change to the trends of required second appraisals,” Irwin tells RMD in an interview. “If the collateral risk assessment is having its intended effect, further protecting the MMI fund, then we are fully supportive of that.”

The Federal Housing Administration (FHA) is pleased with the impact that the CRA is having on the health of the HECM book of business inside the Mutual Mortgage Insurance Fund (MMIF), according to FHA Commissioner and Acting Deputy Secretary of the Department of Housing and Urban Development (HUD) Brian D. Montgomery.

“By implementing this two appraisal policy in some instances, we estimated about 25% come in requiring a second appraisal,” Montgomery said during the Q&A portion of his keynote speech at the NRMLA Annual Meeting in Nashville, Tenn. recently. “It’s been around 20-21%. It’s a little less than expected, but we did note that the appraisals in general this year came in about 1.8% below what they were before we put the policy in place.”

Just that 1.8% difference on its own was enough to put $250 million into the MMIF, Montgomery said. “It’s amazing how [through] little changes like that, we can pick up economic value,” he added.

Covering the cost

Different lenders also have different perspectives in terms of how the second appraisal is ultimately paid. On the east coast, one originator says that while there was an earlier rush to second appraisal activity shortly after the CRA was instituted, things have slowed down. In cases where they happen, though, the lender can opt to pay for it.

“After an initial wave of second appraisals, we are not seeing many outside of new construction,” says Laurie MacNaughton, Reverse Mortgage Consultant with Atlantic Coast Mortgage outside Washington, D.C. “This said, I always prepare my borrowers for the possibility one may be required, and homeowners seem to take it in stride. In the event an application is flagged for a second, we cover the cost.”

Covering the cost of a second appraisal is also “standard practice” at First Choice Loan Services, Inc. in Dallas, Tex. Sue Milligan, an originator with First Choice, describes covering the cost of a second appraisal as an issue of fairness for the client.

“Most of my clients cannot afford to pay for the first [appraisal], let alone a second one,” she says. “My boss was really concerned about HUD’s implementation of this ruling, because he said that FHA never allowed the borrower to pay for a second appraisal on forward loans. So, we both agreed that we would pay for the second appraisal, if one was required, out of our commissions. We split the cost of the appraisal 50/50.”

Industry acclimation to the rule

The collateral risk assessment has often been a subject of derision among those who work in the reverse mortgage industry according to valuation professionals, with some perceiving it to signify the addition of an unnecessary complication on an already heavily-regulated financial product.

Nevertheless, lenders appear to be adapting to the requirements of the collateral risk assessment, which makes its existence and potentially positive effect on the MMI fund potentially more justified, according to Elly Johnson.

“As with many of HUD’s program changes, the CRA implementation seemed daunting at first and although there are still some issues with reconciling two appraisals, I believe most lenders have settled in with the new requirement,” Johnson tells RMD. “I agree with the concept and think the CRA is good for our product. I would however like to see HUD consider alternative valuation approaches to achieve the same result, resulting in less cost to our seniors and to help solve some of the internal ‘two appraisal’ issues.”

Two potential examples that can serve as possible alternative approaches include Automated Valuation Models (AVMs) and desktop appraisal reviews, Johnson says.

“These are commonly used as collateral assessment tools with positive results,” she adds.

Reasons for the extension of the CRA

The reasoning behind the extension of the CRA, as codified by Mortgagee Letter (ML) 2019-16 published in September, was due to the effects the policy was having on the status of the Mutual Mortgage Insurance Fund (MMIF), according to Dr. Joshua Miller, senior advisor to the deputy assistant secretary in the Office of Single Family Housing at U.S. Department of Housing and Urban Development (HUD).

Speaking to the audience at the NRMLA Annual Meeting in Nashville, Tenn., Miller said that the initial implementation of the CRA required reviews of the policy at six and nine months, respectively. It was the results of those reviews that led the Department to indefinitely extend the rule.

“We specifically evaluated risks and the costs to HECM borrowers, the American taxpayer and mortgagees,” Miller said. “Through this analysis and evaluation, we were able to quantify and show that the policy had its intended effect. In particular, we found lower expected losses to the MMIF and to the American taxpayer.”

While the rule itself has sometimes been a pain point for members of the industry, Miller said that the effectiveness of the rule as gleaned in its review is what ultimately convinced the Department to continue it.

“I think the takeaway from this was that we were able to not only implement a policy which had a positive effect, we were able to document that and continue on using it,” he said.

Automation of second appraisals, other HUD processes

There was also an additional benefit to the CRA on a procedural level according to Erica Jessup, acting home valuation policy director for the Office of Single Family Program Development at the HUD.

“I think it’s important to highlight how we started this whole process manually,” she said at the NRMLA Annual Meeting. “Because it required a lot of work, time and effort, not just from an FHA standpoint, but also those of you in the industry. That manual process took a lot of effort to get those original appraisals, you were required to email them into the FHA Resource Center, and then allow FHA staff to review and make a determination if a second appraisal was needed.”

Shortly thereafter, on November 30, 2018, FHA announced that it was now able to automate that process, which can potentially help the agency to seek additional automation of other processes in the future.

“That’s a huge accomplishment, not just from an FHA standpoint but from an industry standpoint,” Jessup says. “We’re looking for that continued participation as we try to automate some of our services.”

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  • The analysis above is very weak. The impact of Collateral Risk Assessment (CRA) was all but negligible in the first quarter of fiscal 2019. Why? Only a relative small percentage of the HECMs endorsed in the first three months of fiscal 2019. The reason is that

    1) the normal lag time for the average HECM to go from case number assignment to endorsement is 4 months and

    2) only HECMs with case numbers assigned on or after October 1, 2018 are subject to CRA.

    So what will the loss reduction be on HECMs endorsed during fiscal 2020 since all of those HECMs will be subject to CRA? Without a much fuller presentation of the analysis from which the $250 million was derived, it is very difficult for the industry to make such estimates. It is like telling my youngest grandchild that the answer is what it is and finding that completely acceptable but not my oldest grandchild. The industry deserves a more thorough presentation than an explanation that would only satisfy the mental capacity of a toddler.

    Then we come to the most crucial question of all. HECM endorsements fell by 35.3%. How much of this loss is attributable to each of the following: CRA, the 10/2/2017 changes, and financial assessment? It is obvious that HUD does not want informed criticism of their policy changes and that is a real shame.

    Even though fiscal 2018 was the end of six years of downward sloping, peak to valley, secular stagnation, it was also the first of two straight years of substantial losses in fiscal year HECM endorsements. NO ONE knows if 2020 will be the start of another period of secular stagnation for HECM endorsements or the third straight year of fiscal year HECM endorsement losses. NO ONE predicted that the last decade would be years of loss and secular stagnation followed by the worst percentage loss in HECM endorsements for any fiscal year in the history of the industry.

    Is this but another fiscal year of irrational exuberance without the fresh air of being realistic? So far once again the mood of the industry is based in anecdote rather than facts.

  • Writing at 3am is never a good idea. One major addition must be added to the first few sentences of the first paragraph. Those sentences should read as follows:

    “The analysis above is very weak. The impact of Collateral Risk Assessment (CRA) was all but negligible in the first quarter of fiscal 2019. Why? Only a relative small percentage of the HECMs endorsed in the first three months of fiscal 2019” {were subject to CRA}.

    The quotation marks identify what did not change and the four words between the braces should have been added.

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