The Federal Housing Administration (FHA) recently announced that it will begin requiring lenders originating new Home Equity Conversion Mortgages (HECMs), also known as reverse mortgages, to provide a second property appraisal under certain circumstances. According to the FHA, lenders must now provide a second independent property appraisal in cases where the Administration determines there may be inflated property valuations.
The new requirement applies to 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 after 2019.
The 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 FHA states that this new appraisal validation policy will further reduce risks to FHA’s Mutual Mortgage Insurance Fund (MMIF) and protect the health of the HECM program.
The FHA notes that 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.
Additionally, he Department of Housing and Urban Development (HUD) and its paper titled “Reverse Mortgage Collateral: Undermaintenance or Overappraisal?” notes that the higher-than-expected losses in the HECM program can be attributed to optimistic estimates of collateral value driven by exaggerated property appraisals when the loan was originated.”
The FHA’s letter to mortgagee’s can be found here.