FHA moves to tackle collateral risk in reverse mortgage portfolio: The Federal Housing Administration has tightened appraisal standards for reverse mortgages, using Mortgagee Letter 2018-06 to introduce a new collateral risk assessment – and, in some cases, a mandatory second appraisal – for Home Equity Conversion Mortgage (HECM) originations.
The policy, announced on 28 September 2018, is pitched as a protection both for the Mutual Mortgage Insurance Fund (MMIF) and for older borrowers relying on HECMs to tap their housing wealth.
What Mortgagee Letter 2018-06 changes
Collateral risk assessment on every HECM appraisal
Under the letter, every appraisal used for a new HECM must be submitted through FHA’s systems for a collateral risk assessment before the loan can move forward.
FHA then reviews the valuation using its own criteria and data. Based on that assessment, the agency either allows the lender to proceed on the original appraisal or instructs the mortgagee to obtain a second, independent report.
Second appraisal when values look high
Where FHA’s assessment suggests the value may be inflated, the lender is required to:
- Order a second appraisal from a different appraiser; and
- Use the lower of the two values to determine the principal limit and maximum claim amount.
That “lower-of-two” rule is designed to remove any upside for overly optimistic valuations and to curb losses where HECM balances ultimately exceed sale proceeds.
Interim policy with scope to extend
Mortgagee Letter 2018-06 was introduced as an interim measure, initially covering case numbers assigned from 1 October 2018 through 30 September 2019, with HUD retaining the option to extend or amend the process after reviewing results.
HUD has since refined the mechanics of the second-appraisal protocol and integrated it into its broader HECM policy framework.
Why HUD acted: pressure on the MMIF
The HECM programme has been under scrutiny for its impact on the MMIF, with legacy books and weaker house price performance in some markets driving higher-than-expected losses.
Because FHA ultimately bears the risk that sale proceeds will not cover the loan balance, inflated or poorly supported appraisals can translate directly into claims. Mortgagee Letter 2018-06 is HUD’s attempt to get tighter control over that collateral risk without shutting down access to reverse mortgages altogether.
Operational impact for lenders and AMCs
For HECM lenders and appraisal management companies, the letter adds a new gate between appraisal completion and closing.
A typical workflow now looks like this:
- Order and receive the HECM appraisal.
- Submit the report to FHA for collateral risk assessment.
- If FHA flags the case, order a second appraisal and re-underwrite using the lower value.
In practical terms, this can:
- Add time to the process if a second assignment is required.
- Increase complexity for operations teams, who must track FHA’s decision and ensure the correct value feeds through to documents and disclosures.
- Drive cost pressure, as borrowers may be charged for two appraisals in some cases, subject to fee and disclosure rules.
Well-prepared lenders are building in extra capacity on their reverse mortgage panels, tightening milestone tracking in their systems, and training staff to handle second-appraisal instructions quickly to minimise delays.
What it means for borrowers and advisers
For borrowers, Mortgagee Letter 2018-06 may result in:
- A longer timeline if a second appraisal is needed; and
- A lower maximum loan amount, where the second value is below the first.
HUD argues the trade-off is worthwhile: more conservative valuations should reduce the risk of negative equity and lessen the chance that seniors are encouraged into loans based on unrealistic house prices.
Advisers and counsellors will need to:
- Set expectations around the possibility of a second appraisal.
- Explain that FHA – not the lender – decides when a second valuation is required; and
- Be clear that the lower value will govern how much the borrower can draw.
Where it fits in the wider FHA rulebook
Mortgagee Letter 2018-06 sits alongside a broader FHA effort to consolidate and tighten reverse mortgage guidance, including updates to the Single Family Housing Policy Handbook.
For MortgageDaily readers, the key takeaway is that appraisal quality and collateral data are now central to HECM oversight. Lenders that treat second-appraisal risk as a routine part of their process – rather than a one-off exception – will be better placed as FHA continues to refine its reverse mortgage rules.
