One thing you should know if you are contemplating a reverse mortgage is that your home will have to undergo an appraisal by an FHA-approved appraiser.
This will be a very extensive appraisal in which the appraiser should inspect your entire property, should do a head and shoulders inspection of the attic (pop his/her head up and take a look around) measure the home and will be responsible for checking a large number of items.
The physical inspection is only a portion of the actual appraisal, the appraiser will usually have done a lot of the research on recent sales of in the area before they ever visit your home and so the actual physical inspection may not take too long.
HUD Appraisal Laws
But let’s talk about what the HUD and the lending laws allow the lender to do in this process.
To understand where we are now, we really have to start by going back to 2008 and before the housing market imploded.
At that time, lenders could order an appraisal from any appraiser they wished and if they felt the appraiser was doing a poor job or was not responsive enough, they could “fire” the appraiser and obtain a report from another appraiser.
HUD’s process was always that once an appraisal was ordered and obtained, that appraisal was supposed to be logged into the HUD system but some brokers and lenders were not always consistent with this step which allowed the originator or the borrower to “appraiser shop”.
When the housing market bubble burst and homes were found to be way over-valued, HUD, congress and local lawmakers questioned appraisers who indicated that their livelihoods depended on the values they reported; they claimed they often didn’t get paid, they lost clients when they could not hit the requested values or any number of other punitive actions and were forced to bring in unsupported values to stay in business.
As a result, in 2010, FNMA, FHLMC, HUD and private investors instituted rules and State and Federal Laws were passed known as Appraiser Independence Rules/Laws. These rules and laws placed limitations on people involved in consumer credit transactions secured by the principal dwelling of the consumer that would violate the appraisal independence. The law is written as such:
(a) In general It shall be unlawful, in extending credit or in providing any services for a consumer credit transaction secured by the principal dwelling of the consumer, to engage in any act or practice that violates appraisal independence as described in or pursuant to regulations prescribed under this section.
(b) Appraisal independence For purposes of subsection (a), acts or practices that violate appraisal independence shall include—
(1)any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person with an interest in the underlying transaction compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm, or other entity conducting or involved in an appraisal, or attempts, to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser;
(2)mischaracterizing, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit;
(3)seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction; and
(4)withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between the parties.
Appraiser Independence Laws
If you will note, interested parties (which includes homeowners and lenders) cannot, by law, “instruct” the appraiser by even supplying a value we believe the home should be any longer (in addition to any other action that would interfere with his/her independent valuation of the property).
To do so is a violation of the law and the appraiser not only can but is instructed to report us to the authorities.
We have had some borrowers in the past who did not receive the value they wanted on their appraisals and felt that we had in some way instructed the appraiser to come in with a lower value.
To do so would put our licenses in every state in jeopardy, cost us our HUD approval, and would subject us to $10,000 fine EACH DAY such violation occurs.
When we order an appraisal, we cannot and do not suggest a value to the appraiser as this would place us in violation of HUD Rules, the licensing rules of each and every state in which we are licensed and state and federal laws.
In short, trying to increase or limit values on homes would put us out of business.
Now the law does allow an exception that is not construed as violating the appraiser independence and that is to request corrections of errors, reconsideration of additional information that the appraiser did not use and to provide further detail and substantiation or explanation if you feel that the appraiser did not take some things into consideration that he/she should have.
That portion of the law appears below:
(c) Exceptions The requirements of subsection (b) shall not be construed as prohibiting a mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, consumer, or any other person with an interest in a real estate transaction from asking an appraiser to undertake 1 or more of the following:
(1) Consider additional, appropriate property information, including the consideration of additional comparable properties to make or support an appraisal.
(2) Provide further detail, substantiation, or explanation for the appraiser’s value conclusion.
(3) Correct errors in the appraisal report
If the appraiser is completely negligent or derelict in his/her duties, then we have options to seek a new appraisal but this is not available simply because you don’t like or don’t agree with the value.
In those cases, you can register complaints to the licensing board in the state in which the appraiser is licensed and can file a grievance with HUD and we can request a new appraisal for particularly egregious instances of appraiser malfeasance.
If you feel that your home is worth more than the value the appraiser assigned, the only way to rebut the conclusion of value is to request reconsideration within the confines of the law.
If you disagree with the appraiser
If you ask the appraiser to correct errors (the appraiser said your home is 2800 square feet and you think it is 2900 and therefore worth more), the appraiser may simply disagree with you, find other information from old appraisals where other appraisers also concluded very similar square footage, shake it off due to rounding of different measurements or even change the report but state that the additional 100 square feet has no effect on the value.
If you disagree with the appraiser about the value of the amenities (the view, the upgrades, the landscaping, etc.) this is a very difficult argument to win. Unless you have additional sales of homes the appraiser did not use in the report with amenities just like yours that are not different in other ways, it is your opinion vs the appraiser’s.
Your opinion doesn’t matter
You are an interested party to the transaction and typically are not a licensed appraiser approved by HUD.
Therefore your opinion is unqualified and obviously biased. This is no insult, my opinion is obviously biased when it comes to my home and its value as well. So the area in which all of us has the best possible chance of obtaining a reconsideration of value is to provide additional comparable properties to make or support a higher value that the appraiser did not consider.
When doing this, it is important to remember that the appraiser is not going to consider one floor plan more desirable than another and other things you feel everyone in your neighborhood just “knows” will bring more value unless there are sales that can verify the contention.
In other words, if you live in a tract of homes where the builder built one model with open concept and higher ceilings that sold for more when the tract opened 15 years ago but all the recent sales indicate that they are now selling for about the same prices, the appraiser will not consider the premiums that the one floor plan brought when the models first opened.
Bring facts on other home sales
If you want to contend that your floor plan will now bring more than a competing plan or your tract more than a previous phase or subsequent tract built just a quarter of a mile away, you would need to be able to support your conclusion with actual sales supporting lower and higher sales based on the floor plan/location.
If those sales do not exist, it would be very difficult to convince an appraiser that their estimate of value is not accurate based on no closed sales to support that conclusion.
We have actually had some homeowners suggest that we as a lender worked with the appraiser with the ultimate goal to keep the property value down when their value was not as high as the borrower wanted it to be. Let me explain to you why this really makes no sense. The reverse mortgage is a HUD insured loan.
Lenders have no incentives for low appraisals
We use an FHA appraiser (who we don’t even get to pick, with whom we have no relationship and by law to whom we cannot even suggest a value) and if there is a default on the loan and we have followed all the rules, HUD pays for the losses out of the insurance fund.
We have no incentive to try to lower the value because we are at no personal risk on the default.
Holding down your value would not save us anything at all but it hurts not only you but us as well when the lending process becomes bogged down with valuation issues.
Things would be so much smoother for us if every single appraisal would go smoothly and every value would come in at the borrowers’ expectations.
Every time a value comes in low, there is a risk that the borrower may not be able or willing to close the loan.
This represents a lot of work and costs on our side that we do not recoup if the loan cannot be closed.
Presumably this is why HUD took the valuation process out of the originator’s hands in the first place, because they were convinced that some originators were a little too motivated to find a way to bring values in whether they were supported or not.
The appraisal of your home is a snapshot in time. The appraisal is one person’s opinion of value based the comparison with competing homes that have sold.
There are Uniform Standards of Professional Appraisal Practice (Find USPAP info here) that all appraisers must follow and then additional rules for FHA appraisals to which the appraisers must also adhere.
If you do not like or agree with the value even after you have rebutted the value as allowed by law and have exhausted all avenues, you can always cancel the loan, wait for the appraisal to expire and reapply but HUD will not allow a new appraisal until after the first appraisal is over 120 days old.
However, there is something very important that you need to know – the rules are the same for all lenders!
Going to another lender will not solve your problem
HUD has required appraisal logging for a number of years but within the past year they went one step further. Every appraisal now completed for an FHA appraisal is submitted to HUD before it even goes back to the lender through the HUD Electronic Appraisal Delivery Portal (EADP).
HUD sees the appraisal via EADP before the lender has it and it is tied to the case number and the borrower’s property – any new lender also has to work with the same appraisal for as long as the appraisal has not expired.
Once the appraisal expires, then all lenders would have to order a new appraisal and there are no guarantees on the next value.
If the sales are there to support a higher value on the next attempt, the next appraisal may in fact come in higher but only a new appraisal can tell.
After all, it too is an opinion of value and is a snapshot in time so it would depend on the sales at that time and that appraiser’s opinion based on the information available then.
There could be additional sales after the initial 4 month period that support a higher value and it could be that a different appraiser sees things differently, but there is no guarantee that a new appraisal will achieve a higher result and if any originator tells you that they can get a higher value, they are not being honest with you about their role in the valuation process or what they can and cannot do or when.
The Bottom Line
But the bottom line is that the lender has no control whatsoever over your appraised value and that is by design and by law.
If we did, we certainly would not want the values to come in low so that we could expand massive amounts of time, energy and costs only to see your loans not close.
After all, we are not in the business to process loans and then let them fall by the wayside.
If you find yourself in the unenviable position of not agreeing with the appraised value always know that you can rebut the value with bona fide sales that support a higher value or you can cancel and begin the loan again at a later time if you feel that would be more advantageous.
You can even file complaints with the state licensing board that licenses the appraiser or with HUD since they approve the appraiser for FHA appraisals if you feel the appraiser has acted illegally or unethically but please don’t ever think that if your lender can’t find any additional sales to support a higher value that they want the value to be lower.
And please don’t mistake our explanations of the appraiser’s viewpoint or our limitations under the laws and rules as our siding up with the appraiser – it’s our job to let you know what is happening and to let you know if we can reasonably expect a different outcome based on our research.
If the time comes that we can no longer support a reasonable argument to request a reconsideration of value, it’s our job to tell you that as well so that you can make an informed decision.