Where a second appraisal is required, lenders must use the lower value of the two appraisals.
By Jeff Sorg, OnlineEd Blog
(October 2, 2018)
(WASHINGTON) HUD – The Federal Housing Administration (FHA) announced that it will begin requiring lenders originating new Home Equity Conversion Mortgages (HECMs), commonly referred to as reverse mortgages, to provide a second property appraisal under certain circumstances. FHA is instructing lenders to provide a second independent property appraisal in cases where FHA determines there may be inflated property valuations.
FHA’s new requirement takes effect for case numbers assigned on or after October 1, 2018 through September 30, 2019. FHA will periodically review this guidance and, based on the results, may renew these requirements beyond fiscal year 2019. Read FHA’s Mortgagee Letter.
FHA will perform a risk assessment of appraisals submitted for use in new HECM originations. Based on the outcome of that assessment, FHA may require a second appraisal be obtained prior to approving the reverse mortgage for an insurance endorsement. Under the new policy, lenders must not approve or close a HECM before FHA has performed the collateral risk assessment and, if required, a second appraisal is obtained. Where a second appraisal is required by FHA, lenders must use the lower value of the two appraisals.
The appraisal validation policy announced today will further reduce risks to FHA’s Mutual Mortgage Insurance Fund (MMIF) and protect the health of the HECM program. The financial soundness of FHA’s reverse mortgage program is contingent on an accurate determination of a property’s value and condition. The property value is used to determine the amount of equity that is available to the borrower and it is also used by FHA to determine the amount of insurance benefits paid to a mortgagee.
In a 2017 evaluation, the U.S. Department of Housing and Urban Development (HUD) found higher-than-expected losses in the HECM program could be attributed in part to “optimistic estimates of collateral value driven by exaggerated property appraisals when the loan was originated.”
FHA is addressing the accuracy of appraised property values due to continuing volatility in the HECM program. Last year, FHA’s Fiscal Year 2018 Annual Report to Congress found the agency’s reverse mortgage portfolio had a negative capital ratio of 19.84 percent and a negative net worth of $14.5 billion. To begin to address the financial solvency of the program, FHA instituted several reforms to the HECM program to improve its financial health and to ensure reverse mortgages remain a resource to allow senior borrowers to remain in their homes and age in place. FHA is continuing to analyze the impact of these reforms and expects to provide an assessment in its Annual Report on the financial status of the MMIF.
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Jeff Sorg is a co-founder of OnlineEd®, an online real estate, mortgage broker, and vocational school founded in 1997, where he also serves as Chief Executive Officer, and School Director. Sorg holds vocational and post-secondary school instructor licenses in several states and has authored numerous real estate continuing education and pre-licensing courses and has been awarded the International Distance Education Certification Center’s CDEi Designation for distance education. Memberships include ARELLO (Association of Real Estate License Law Officials), the National Association of REALTORS®, Oregon Association of REALTORS®, and Portland Metro Association of REALTORS®. Awards and service include REALTOR® Emeritus in the National Association, Life Member award in Portland Metro Association and Chairperson of the Oregon Real Estate Forms Committee.
OnlineEd® provides real estate, mortgage broker, insurance, and contractor pre-license, post-license, continuing education, career enhancement, and professional development and designation courses over the Internet.