FHA addresses HECM volatility with second appraisal requirement

by Francis Monfort03 Oct 2018

The Federal Housing Administration has announced that it will begin requiring lenders originating new Home Equity Conversion Mortgages (HECMs) to provide a second property appraisal amid continuing volatility in the program.

Lenders originating reverse mortgages could be required to provide a second independent property appraisal in cases where FHA determines there may be inflated property valuations.

Appraisals submitted for use in new HECM originations will be assessed by the FHA for risk. Based on the assessment, the FHA may require that a second appraisal be obtained prior to approving the reverse mortgage for an insurance endorsement.

The new policy prohibits lenders from approving or closing a HECM before the FHA has performed the collateral risk assessment. Where a second appraisal is required, lenders must use the lower value of the two appraisals.

The requirement takes effect for case numbers assigned on or after Oct. 1 through Sept. 30, 2019. The FHA said it will periodically review the guidance and, based on the results, may renew the requirements beyond fiscal year 2019.

The guidance follows a 2017 evaluation by the Department of Housing and Urban Development which found that 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.”

“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,” the FHA said in a press release.