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2nd Appraisal to Be Required on Some HECMs

Appraisal

Ongoing losses in the government-insured reverse mortgage program have led to a new policy that will require a second appraisal on some transactions.

In the Federal Housing Administration’s fiscal-year 2017 Annual Report to Congress, the
negative capital ratio on FHA’s book of home-equity conversion mortgages was 19.84 percent.

In addition, the report
indicated that the HECM book had a negative economic net worth of $14.5 billion — leaving the program out of compliance with the Federal Credit Reform Act of 2018.

To improve program performance, FHA issued Mortgagee Letter 2017-12 in August 2017 revising the annual mortgage insurance premium rates and principal limit factors for new originations.

“Despite these changes, projected losses for the HECM portfolio indicate the need for changes to further mitigate risk,” FHA said Friday in
Mortgagee Letter 2018-06.

An evaluation last year by the Department of Housing and Urban Development found that one possible reason losses exceeded expectations was “optimistic estimates of collateral value driven by exaggerated property appraisals when the loan was originated.”

“The financial soundness of FHA’s reverse mortgage program is contingent on an accurate determination of a property’s value and condition,” FHA said. “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.”

So
more changes are being made to the HECM program’s appraisal requirements as authorized by the Reverse Mortgage Stabilization Act of 2013.

First, FHA will perform a collateral risk assessment on each appraisal done for an HECM.

Based on the assessment, FHA could require that a second appraisal be done before it will endorse the loan.
When there is a second appraisal, the lower value of the two reports will be used.

“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,” FHA said.

Impacted HECMs include those with case numbers assigned by FHA from after Oct. 1, 2018, through Sept. 30, 2019, though the guidance could be renewed beyond fiscal-year 2019 depending on subsequent reviews.

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