The Federal Housing Administration (FHA) this week announced that the ability for property appraisals to be conducted via an exterior-only inspection – a core relief component for the reverse mortgage industry implemented at the beginning of the COVID-19 coronavirus pandemic – will be allowed to expire at the end of June as laid out in a Mortgagee Letter (ML) that last extended the practice, according to an announcement issued by the agency.
ML 2020-05 published in March, 2020 created the appraisal relief measures related to COVID-19 in order to minimize instances of contact between senior borrowers and appraisers, in light of the fact that the disease which can result from COVID-19 inordinately affects seniors according to guidance from the Centers for Disease Control and Prevention (CDC).
Expiration of exterior-only appraisals
The specific changes to the FHA Appraisal Protocols included that in terms of reverse mortgages, most HECM for Purchase (H4P) transactions would be able to utilize either the exterior-only or desktop-only appraisal options, while traditional HECMs and HECM-to-HECM refinances will qualify for exterior-only inspections alone.
All appraisals made in connection with FHA’s forward or reverse mortgage portfolios can utilize either the exterior-only or desktop-only appraisal options, according to the original March, 2020 guidance. The exterior-only option was allowed to expire at the end of October, 2020.
Recent internal data from FHA indicates to the agency that the amount of usage the exterior-only appraisal option is currently exhibiting makes the currently in-place expiration date of June 30 acceptable.
“[T]he Federal Housing Administration (FHA) is issuing this reminder that the temporary guidance concerning FHA’s re-verification of employment, and exterior-only appraisal scope of work option policies will expire as intended on June 30, 2021,” FHA said in FHA INFO 21-44. “This temporary guidance was first announced on March 27, 2021, in ML 2020-05. […] Because recent data reflects low usage, FHA believes the expiration of this guidance will have a minimal impact to the industry.”
Appraisal provisions originally outlined in ML 2020-05 were re-extended several times over the past 16 months. Previously, the allowance for desktop and curbside appraisals was in place through May 17 per ML 2020-05 published in late March, extended through August 31 with ML 2020-20 and most recently extended through October 31 in ML 2020-28. The policies were last extended through June 30, 2021, by ML 2021-06 in February.
Appraisal professionals with work experience on reverse mortgage-specific property valuations are generally optimistic about this move by FHA as illustrative of progress made in moving on from the pandemic, but that does not mean that this period will be without necessary adjustment.
In one respect, the relief handed down to the appraisal process by FHA weren’t particularly widespread to begin with, according to John Dingeman, chief appraiser at Class Valuation based in Troy, Mich.
“One of the challenges for FHA assignments surrounds the condition of the property, and for many appraisers completing an exterior-only inspection did not allow them the ability to properly identify relevant property characteristics and to credibly render an opinion of value,” Dingeman tells RMD. “As a result, the use of the flexibilities was already limited.”
Another appraisal professional is pleased to see these measures expire because of a renewed need for overall levels of consistency in a marketplace that has been without it, in some respects, during the pandemic period.
“Overall, I am glad to see that the exterior-only appraisals are coming to an end at this time,” says Joshua Van Horn, SVP and chief appraiser at Mortgage Information Services, Inc. (MIS) based in Cleveland, Ohio. “This is especially true due to the need for consistency within the appraisal industry. The GSEs ended their temporary flexibilities at the end of May, and therefore it only seems to make sense that FHA end theirs as well. While the need for an exterior option was well understood, the challenges with these types of assignments did not become any less challenging as time went on.”
The disadvantages of flexibility
Use of certain FHA flexibilities also had other potential disadvantages, including the creation of unnecessary puzzlement on the part of certain stakeholders, Dingeman says.
“The flexibilities also created confusion in the marketplace,” Dingeman explains. “They were really set in place for the appraiser (not the mortgagee or the consumer), however, appraisers were frequently being asked to use the flexibilities even when they felt it was inappropriate. Based on that, also the number of regions that have completely reopened their state, and the vaccination rate – I do not believe this will have a significant impact.”
That confusion has also been seen by Van Horn, an issue which was potentially exacerbated by the repeated extensions of the appraisal policies, as well as potential conflicts with requirements at other government agencies that appraisers need to observe.
“It seemed that as the weeks turned into months, then a year, there was still a great deal of confusion regarding the minimum expectations of appraisers with regard to level of inspection and when it is appropriate to utilize assumptions within the appraisal process,” Van Horn says. “In addition, the FHA and GSEs requirements remained at odds with regard to the use of assumptions as well. This led to continuous confusion and frustration among the appraisers working hard to navigate the requirements in addition to the overwhelming volumes they have been experiencing during this period of time.”
Another problem faced by appraisers related to the comparison of data from an exterior inspection when compared with other information sources which were created prior to the pandemic and, by extension, new appraisal relief policies.
“Another issue that continued to arise was the concern with discrepancies between the data the appraiser was able to obtain when compared to prior interior appraisals or public data,” Van Horn explains. “This has been a struggle for appraisers and the users of appraisals throughout, and the return to interior inspections and on-site verification of property characteristics will be a return to the additional confidence in the credibility of the appraisers assignment results that can only be obtained with a visual inspection of the property.”