Pandemic Brings Reverse Mortgage Appraisal Challenges, Second Appraisals Remain Stable

Although the federal government has allowed certain forms of relief for property appraisers during the COVID-19 coronavirus pandemic, the possibility of a second appraisal of a prospective reverse mortgage property remains a distinct possibility in a minority of cases during these unusual times.

This is on top of some of the confusion that has been caused by the abrupt changing of appraisal practices during the pandemic, which in some cases can be overcome with the greater incorporation of new technologies into the appraisal process. This is according to executives from appraisal management company (AMC) Class Valuation during a panel discussion at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Summer Conference last week.

Second appraisals: a continuing issue, though stable during pandemic

Reverse mortgage loan officers across the country continue to see second appraisals come in for some properties they’re seeking loans for. While loan officers remain frustrated by the continued presence and looming potential of a second appraisal, it remains a bit of an unavoidable scenario for some properties regardless of the pandemic and additional appraisal relief according to John Dingeman, chief appraiser at Class Valuation.

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“The HECM second is the reference,” Dingeman explained. “So, the first appraisal was flagged by FHA, and likely for overvaluation to begin with. Maybe it’s a complex property. We could look at that in advance and recognize that it’s likely going to trigger a HECM second [appraisal].”

That might help interested parties to know when a second appraisal is at least likely to take place. While not uniform across all AMCs, policy at Class is to reconcile the two appraisals to find any potential irregularities between the two, Dingeman explained.

“We’re going to look at them and see if there’s any fundamental differences between the property characteristics,” he said. “We’ll also look at the comparables used by both appraisers. Is there a significant difference? Or are they using the same [comparables] and the difference [comes from] the adjustments? We work through that with our partners, and we do try to get the reports reconciled so that we’re providing fair and accurate reports to our clients.”

In terms of whether or not the pandemic has affected the amounts of second appraisals being seen, it doesn’t appear that is the case according to
Erik Morin (formerly Richard), Chief Operating Officer, specialty teams at Class Valuation.

“I haven’t seen that,” he said. “I actually do track that because we don’t charge our clients for second appraisals on HECMs, and I haven’t seen those numbers shift. There are slight ups and downs each month, but right now we’re running somewhere between 16 to 18% [of HECMs requiring a second appraisal].”

That number can shift based on factors like the lender and the location of the property, so diving deeply can reveal rates of second appraisals that can be substantially higher or lower. On average, however, the pandemic does not appear to be changing the rates of second appraisals.

New challenges for contact-less appraisals

When the U.S. Department of Housing and Urban Development (HUD) released a Mortgagee Letter (ML) allowing for exterior-only and desktop-only property appraisals for reverse mortgages at the end of March, it was a necessary step to ensure that property appraisals still took place in the midst of stay-at-home orders and social distancing guidelines. However, because it constituted a different way of doing things for the appraisal business on the reverse mortgage side, there were some proverbial “speed bumps” along the way.

“While we didn’t see a substantial impact to overall volume, we definitely saw a lot of confusion in the marketplace on how to handle these products,” said Morin. “On the technical side, appraisers [had to] get used to using forms in a way that they’re not typically used to using those forms.”

While additional options for exterior-only and desktop-only appraisals have been historically more common on the forward mortgage side, they were generally new for the reverse mortgage side, and the appraisers had to become quickly accustomed to using their expertise in different ways than they were used to, Morin explained.

“And then on the flip side of that, you have an appraiser demographic that is aging, and so you have older appraisers in the field navigating around senior borrowers and wanting to make sure that everyone remains safe, and everyone’s doing that in slightly different ways,” Morin said. “And so, while there wasn’t a reduction in volume, there certainly is a lot of uncertainty as to exactly how to proceed.”

Appraisers are also preparing for the current situation to potentially persist through wintertime barring some major change in the health crisis, he said.

Having to adjust to using an interested party — namely the homeowner — to relay accurate information regarding the condition of their home has also been a struggle according to Dingeman.

“We can call the homeowner as an appraiser now, we can obtain photos so that we can make a judgment call and make an opinion based on the condition of the property or repair items,” Dingeman said. “Appraisers are still using the same assumption that based on their exterior observation, ‘the house looks like it’s an average condition from the curb, therefore it must be average inside.’ They can’t use that assumption.”

Making any value determination requires facts and data to back it up, Dingeman said, which often means extensive property photographs as well as interviews with the borrowers themselves. At that point, an appraiser can make an assumption based on whether or not the extensive information that they’ve gathered is indeed true and accurate, Dingeman said.

Technology as a way forward

The issues that can come from desktop-only and exterior-only appraisals might also be mitigated by the use of technology, including an app developed by Class Valuation that a homeowner can use to provide an appraiser with accurate information about their property, Morin said.

“If the appraiser can’t see the inside, they’re really flying blind when it comes to value,” he said. “And so by utilizing technology, they can get inside. Early on, we rolled out our [app] probably at the end of April or beginning of May, [and] that was bumping up against the first FHA Mortgagee Letter.”

This led a number of Class’s clients to avoid incorporating the app into their operations, thinking that the various virus mitigation efforts might go away after a couple of weeks. As time has gone on and the efforts to contain COVID-19 continue, more of them are coming back ready to further incorporate the technology into their businesses.

“[Then] we can reassure borrowers that they can capture their value, especially if they’ve made upgrades to their home or have features that really do add value,” he said.

While utilization of the app developed by Class is generally low at the moment, overcoming the lack of market exposure will likely help it to pick up, Morin said.

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  • When discussing the percentage of appraisals that end up requiring a second one, Mr. Morin says, “That number can shift based on factors like the lender and the location of the property . . .”

    Why would the lender be a factor in FHA’s collateral risk assessment?

    • Justin,

      I should clarify because you’re correct the lender is not relevant to the 2nd appraisal requirement. I meant where the lender does business or the types of transactions they are doing. That concentration of business can show one lender having a higher percentage of 2nds than another lender. I hope that helps and I apologize for the confusion.

      Erik (Richard) Morin

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